1/27/2020

How to build your own trading method




If you want to make money trading then you have to develop an edge. You have to find things that work in market and build your trading methods around that structural tendency.

That kind of process requires good understanding of how markets operate and what works and why. If you base your methods on structural tendency of the market then you are likely to be profitable.

What makes some of this process difficult is that you have to figure out everything for yourself. There are many resources you can tap but ultimately the responsibility of making it work is your own.

You have to figure out how markets work on different timeframes and why. You have to figure out how different types of stocks behave over their lifetime. You have to figure out how IPO behave. You have to figure out how value and growth stocks behave. You have to figure out how momentum stocks behave. You have to figure out what factors drive stock returns.

You need to figure out how overall market direction affects the growth, value, and momentum stocks and how to adjust your style.

You have to figure out how to manage risk. You need to figure out how to determine safe periods for your strategy and how to avoid unsafe periods.You have to figure out how to control per trade risk as well as overall risk so that your drawdowns remain very low and you can quickly recover from any setbacks.

You have to design your own method, devise your own rules and have enough confidence to trust your own method.

Unless you start your career in a big bracket investment bank or in a hedge fund, this is the reality of trading success. All individual traders who are profitable over the years have done this and each one has taken a different route to get there and has spent different time frame to arrive at profitability.

Moses is not going to give you 10 commandments on how to trade, perfectly wrapped in a gift box.

The ability to learn trading on your own is going to determine your success. Some people persist at it for years and then they find success. Some try it for a few days or months and that is the end of it.

Even if you find a ready made profitable strategy you may not find success with it till you customise it for your own needs and beliefs and personality.

So much of trading is about individualization of methods to your own unique way of thinking and style. There are no standard methods. There are approaches. If you are smart, you would be able to build a method after studying some of the well known public domain approaches.

One of the big problems for many people is that they are waiting for Moses to give them detailed rules, guidelines and every single nuances. I have bad news for them. It is unlikely to happen. God is too busy handling other big problems in the world than to offer you get rich scheme.

From studying the history of the market you can find profitable approaches. When you study history you will see in spite of market changes, trading technology changes, market participants changes, rules and laws changes, some approaches have survived for hundreds of years.

Find those enduring approaches. Growth investing has been around since 1600 when first stock markets started. It still is around. Value investing has been around since then, so is momentum investing and contrarian investing.

Approaches of trading time frames of day trading, swing trading, position trading, and long term investing have been around since the start of the markets. Technology today has allowed high frequency trading but the other approaches still remain valid.

As a trader you have to choose your timeframe based on your personality, psychological makeup, life styles, need to for regular returns and above all your skill level.

From a concept like breadth , you have to develop your own timing model. At best you can learn from others who have done it before. Will the method and model be perfect? No. Will it be written in stone? No. Will it evolve over a period of time? Yes. But unless you make an effort you will not even reach anywhere.

Due to great dissatisfaction with 401k , I set out a way to develop a method to trade mutual funds. After hundreds of failed approaches and thousands of hours of effort, finally I married two concepts breadth and momentum to create my method for trading mutual funds in 401k.

Over several years I perfected it and fine tuned it. Is it perfect? No. Does it work? Yes. For me it works. I have avoided all bearish periods using it and have had great success beating the averages. It is an approach which I have detailed in many posts for many years. Does it have every rule spelled out? No. Does it have flexibility, yes. The challenge for anyone trying to make it work is to make it work for themselves.

That is the critical challenge . In ability to do that is a source of frustration to most people. It is true of any method. Does Top 25 method work, yes. For me. Does buying breakout works. Yes for me.

Can it work for you?

The answer depends on your own self efficacy beliefs. The most important element in your success is self efficacy beliefs. Self efficacy belief is your judgement about your own capacity to organize and execute a course of action required to attain a designated performance.

In the past I have written extensively on self efficacy beliefs and how you can enhance them. If you run a search for "self efficacy" you will find many posts explaining self efficacy in detail and how self efficacy beliefs are acquired.

How does this concept of self efficacy becomes important to trading? If you understand it you will focus your energy on making following concepts work for you:

  • Swing trading. For hundreds of years traders have been trading some form of swing trading method. All of them arrived at that decision after several trials and errors. Different people use different terminology to describe swing trading. But whether it was Livermore, Darvas, Baruch, O'Neil, Zweig, Wyckoff, or most traders profiled in Market Wizard, one thing is common, they are basically swing traders. Swing traders primarily focus on capturing a part of the move or a swing in stock moves. No one book or website or article or training course will explain to you swing trading. But if you make an effort and spend 1000 hours finding out and thinking about everything related to swing trading you will understand the basic elements of swing trading methods. If you do that you will be able to design your own swing method, you will be able to dissect any method and have enormous confidence in your own ability to swing trade. Moses is not going to give you ready made 10 commandments of swing trading.
  • Entry methods. If you understand swing trading you will understand that basic elements of any swing trading method are entry techniques, exit techniques, stop techniques, risk management techniques. Various traders use various entry techniques. But if you spend 1000 hours studying entry techniques and thinking about it you will find great commonalities. And if you do that you will be able to design your own entry methods for your swing trading. Moses is not going to give you ready made 10 commandments for entry methods.
  • Exit Methods. Various traders use various exit techniques. But if you spend 1000 hours studying exit techniques and thinking about it you will find great commonalities. And if you do that you will be able to design your own exit methods for your swing trading. Charles LeBeau has in fact spent years studying exit strategies and if you spend 1000 hours on exit or entry strategies, you would anyway come across his excellent work on entries and exits. Moses is not going to give you ready made 10 commandments for exit methods.
  • Risk management. Like you thousands of traders have grappled with the issue of how to manage risk and at the same time maximise profits. Again a few basic approaches to risk management has evolved and are widely used. If you spend 1000 hours studying risk management , you would be an expert in risk management. You would also understand the need for market timing. Market timing methods evolved as a result of people's desire to manage risk and maximise returns. And once you start devoting time to market timing, you will invariably stumbleupon market breadth. Thousands have attempted market timing before and based on their studies, few approaches have become cornerstone of timing models. Breadth is one of them. Moses is not going to give you ten commandments of risk management.
  • Vehicle Selection. Once you understand swing trading and the nuances of it , you will also discover that selecting the right stock or instrument to swing trading can greatly enhance or magnify your returns. If you spend 1000 hours researching and thinking about vehicle selection then sooner or later you will stumble upon basic ways to select vehicles using momentum, mean reversion, growth, or value. And then if you spend 1000 hours on each of them, you might conclude momentum and mean reversion might be best ways to select stock for short term swing trading. Growth and value might be good ways to select stocks for longer duration swing trading methods. Moses is not going to give you ten commandments of vehicle selection.

The primary challenge in trading is about expertise development. All studies about the process involved in building expertise show that expertise is built through immersion and thousands of hours of practice. Trading edge is a procedural memory edge. Procedural memory can only be developed by practice and thousands of hours of deliberate practice.

Your self efficacy beliefs will determine if you would even attempt building your own trading expertise.

But your task is simple if you are a member of Stockbee. A Turn key ready made setup and method solution is given to you. You just need to make it work for you. Not only that you have access to several very successful traders approaches and methods. You can interact with them and learn from them.

Over the years thousands of traders have used these methods and made them work for them. And every week you will see some members making progress by adopting these methods to their own trading and being successful.

This allows you to significantly reduce your learning curve and not lose money during the learning curve.

No comments: