Back to Top

Look for setups not stock picks

Posted on 6/11/2019

Setup is a set of conditions that should be present to take a trade.

Basic Setups are:

1 breakouts : start of a swing move long term or short term is indicated by a b/o Breakout is a setup in which price makes a N day high. basic logic stocks move in momentum bursts

2 pullbacks: a major or minor correction in trend but the dominant trend is still up or down. Pullbacks can be short term swing setups or long term setups. Basic logic stocks in uptrend lose momentum for short period of time or momentum slows down. Enter during such slow momentum phase hoping stock will go back in momentum phase

3 exhaustion: exhaustion setups indicate end of a major trend (up or down). Exhaustion may or may not lead to trend change in new direction. Basic logic buyers exhaust themselves leading to reversal same thing on sell side. These do not necessarily look for trend change , but look for the short term bounce once selling exhausts itself.

4 pivot : setups are specific anchors which lead to buy or sell decision. It might be particular price or catalyst or level. These can be news pivots, % pullback pivots as in Fib, or volatility or range based pivots. The basic assumption is such pivots lead to start of momentum or end of momentum.

5 Support and resistance: basic logic is buyers buy at support and sellers sell at resistance. Or at the support or resistance level there is historical buy and sell pressure.

These are some of the commonly used setup ideas. If you innovate around them you can develop your own setups. 

Stop flirting from one trading setup to another

Posted on 6/10/2019
Stop mixing setup ideas from two different sources.

Stop putting bunch of indicators on a setup.

A good setup is structural in nature.

It takes you months to become good at trading a setup. Unless you are willing to put in that much effort on one setup, you will go nowhere.

In a day or a week or a month if you read blogs or watch videos of traders you will be exposed to many new trading ideas and setups.

With proliferation of blogs, books, forums, Twitter and all kinds of media easily available there is constant temptation to flirt from one trading ideas to another.

You will see charts with different indicators and there you go running after it.

If someone highlights a trade then everyone runs to it. 

If some new book comes in everyone gets excited about it.

In the process several things are cursorily tried but no expertise is developed in one type of trading style or setup.

If you see traders who have been around for 10 years plus, you will see that they trade same setup over and over again.

A trading idea or setup is just a idea and unless you think deeply about it and convert it in to process it does not become part of your procedural memory. Your task as a trader is to develop procedural memory. And to develop expertise to execute that setup without any help on your own.

If you want to trade say breakout you need to develop procedural memory for trading it. 

That would involve your ability to run the entire process involved in breakout trading like scanning, identifying good setup from scans, putting stop, determining position size, determining target, exiting, and so on. This is all part of procedural memory development challenge.

Procedural memory only develops after a considerable amount of doing same thing again and again using same step by step process. By doing that you develop procedural memory which becomes permanent part of your memory.

If you constantly flirt from ideas to ideas you will never develop procedural memory.

Individual trades do not matter. Learn process flows. If you learn process flow you will be able to replicate a trade or understand what is involved in finding a trade.

Once you understand process flow you will be able to build your own process template and make it efficient.

Process orientation is extremely important for developing procedural memory.

Procedural memory is a memory of a procedure. It is stored in your brain as one muscle sequence. In a flash the brain can then recall entire process.

Once you become process oriented the cognitive load will decrease.

Follow traders and people here or anywhere else only if they are transparent about their process flow.

If they can not explain step 1 step 2, step 3 and why it should be done that way you will not learn much.

Developing procedural memory is the key to becoming successful trader. Procedural memory is built through repeated practice.

But before you get to repeated practice you should have right process. Else you become good at wrong process and then you need to erase those procedural memories and rebuilt right procedural memory.

Procedural memories are enduring memories and we do not forget procedural things easily. If you learned to ride a bike as child it becomes permanent part of you.

Same way once you develop a setup specific memories they become permanent part of you.

If you understand that commit yourself to trading only one setup for next 6 month.

Most of the ideas you will see around you in trading are rehash of some few basic ideas like breakout, pullbacks, pivots, mean reversion, breadth, trend following, momentum, growth investing , value investing, contrarian investing .

Take any of these ideas and convert it in to process and trade it for months till it is part of your procedural memory. If you wake up in the middle of the night you should still be able to do the process blindly without thinking.

The way procedural memory works is by embedding a muscle or thinking sequence in your memory. A complex task involving say 25 steps is stored in procedural memory as one unit (schema) and when performing the task it is recalled in an instant.

If you want to make money trading stop chasing setup ideas and marry a setup and perfect it.

What should beginner traders do

Posted on 6/05/2019

In the beginning due to lack of understanding of how markets work and how real traders make money ,  you can end up believing in anything. Which can lead to loss of time , money and opportunity.

First thing a beginner trader should do is to try and master a simple setup. Focusing on only one simple setup will help you gain confidence and help you develop skills faster.

Trading a setup in existing established trends is one of the good starting point for beginner trader. Once a stock established a trend it offers you a choice of breakout or pullback setups. There are many variation of these setups but they essentially look for either a momentum burst in existing trend after a period of consolidation or buy during low volatility consolidation/pullback in trends. Typically buying first pullback or consolidation after a trend is established is a simple trade setup. That also ensures you are not buying extended setup.

Simplicity is very important in the beginning phases. That means avoiding piling on too many indicators on your chart or making too many rules for your scans. Simplicity will also allow you to understand each of the indicator you use.

Beginner trader need to put themselves in situation where they have time to consider every detail of the setup they are trading and trade they are making . Simple setup will allow you to plan all elements of the trade.

Consistently trading one setup using consistent process for few months will help you perfect it. That is how a small edge becomes unique edge.

If you study the Market Wizards most took around 10 years to put together a complete method. Many blew up couple of times before that.

What happened during that period is they had many beliefs and assumptions that got shattered or changed.

Your objective should be :

1. reduce that timeframe from ten years to few months. It took me around 2 years to be profitable

2. don't blow up during learning phase. never lost original capital during learning phase. In fact multiplied the original capital multi fold

3. reject lot of hypothesis . hundreds of hypothesis I have rejected

4. find out what actually real traders use. This is the most important thing.

5. find how trades really make money.

6. Don't spend crazy amount during the learning period

7. Innovate around indicators and patterns. Obvious things do not work

8. Talk in person to real trader . You will learn more that way.

9. Get hold of actual  trades of real traders with entry exit and more importantly position size to understand how they really make money as against how you believe they make money

10. Try lot of things without blowing up 

If you are serious about making millions trading , setup a process and daily routine

Posted on 6/04/2019
Key to profitable trading is to be well organized for daily routine. Everyday do the same thing over and over in a systematic manner. Improve the efficiency of your process and have set routines.

If you see any sports person , they have set routine and as a result they can focus and perform well. Trading is very much like sports. If all your process and equipment is in order it is easier to trade.

Once you have a well thought out method the day to day challenge is largely about implementing your plan. That requires setting up a daily routine and adhering to it as far as possible.

Here are some of the things I use to organize my trading.

Daily Situational Awareness (SA) 

I  know swing setups work, but overall market conditions can have impact on the % of trades likely to work. So SA helps you in controlling your trade pace. In good environment you want to be more aggressive. In bad conditions you want to focus on risk management. I daily write my SA and then plan accordingly. In difficult conditions I drop size or take quick profits. If coming out of bottom I look to hold for longer swing moves.

Question I ask daily for SA:

What is your market bias today

Is there a plan to exploit it

Is there an alternative plan

Anticipation of breakouts and news plays

I trade both breakouts and anticipation of breakouts. Anticipation and pullback setups allow you to do all work on them after the market close or before open and plan your trade , put orders in place and pre decide exits.

Anticipation allows you to control risk and get in to setups early or as they are breaking out.  Anticipation is also useful on current open positions. If you have thought through what you will do under different circumstances on your open positions you are in better position.

I trade 3 types of anticipation setups: Breakout anticipation on momentum stocks, pullbacks on momentum stocks, and NTRT and MTRT setup based on news. Most days I have 2 to 5 ideas based on that and orders in place before open.

Question I  ask daily for Anticipation:

What homework have I done to identify good opportunities ?

What are the 3 to 5 very high probability opportunities I must focus on today

What is my plan for existing open positions

More time you spend on anticipation , easier it is because you have ideas in pocket.

What is working currently

Different phases of market favor different kind of stocks or setups. Some time beaten down stocks do well. Sometime stocks with momentum do well. Some time anticipation works well. During earnings season there is big opportunity in earnings plays.

Knowing what is working helps me focus on hot opportunities and adjust the tactics and risk.

Question I  to ask daily for What is working:

What is working in the market currently

What stocks and sectors are leading the market currently

What style and setups are working currently

What kind of follow through is happening

Lot of this insight in gained by studying daily 20% plus weekly winners and Top 25 winners on various time frames of 1 year, six month, 3 month, 1 month. This daily study helps you spot subtle changes quickly.

The hardware and software

All our good plans or intentions or setups are of no use if our hardware or software fails or is not optimum for trading.

Question I  to ask daily for hardware and software:

Are you setup in terms of all equipment and software  for trading today

Is your hardware in proper condition

Is your software working without glitch

What is your backup plan in case of failure.

Your mental state

Your mental state affects your trading. If your are well organized and in proper frame of mind for trading you will be successful. If you are excited, harried, angry, disorganized you will find same thing in your trading.

Lot of time distractions from unrelated to trading events in your life can have big impact on your trading. Being aware of these factors can help you avoid trading aggressively during less than optimum mental stage or distractions.

Question I  to ask daily for mental state:

Are you calm, excited, harried , or confused today?

Are there distractions likely to affect your trading today?

Continuous improvement and research and development

As a trader you need to focus at least 25% of your daily efforts on developing new trading setups and ideas and on enhancing your trading skill and knowledge of market. A purposeful plan to do this will cumulatively help you transitions in to new setups and ideas as market changes.

I spend lot of time on further refining existing setups, simplifying the process, trying alternative order, entry , exit, and stop strategies.

Question I  to ask daily for  improvements :

What is your plan for improving the efficiency of trading current setups

What is your plan for enhancing your market knowledge today

What is your plan for enhancing your trading skills

What is your plan for enhancing your trading mindset

What needs to happen for me to be a confident and in control trader

Trading is easy once all the elements are in place. Once you master setups and processes , extracting money out of markets is not very difficult game but it needs a systematic plan and execution.

Once that is in place ongoing challenge is to sustain motivation and drive.

Do I have resources to get there?

Do I have the burning drive to get there?

Everyday using this kind of framework will make you a better trader . If you rigorously follow these kind of checklist you will see improvements in your trading in  90 days.

If you are serious about making millions trading , setup a process and daily routine.