Sunday, June 26, 2005

The Art of the Trade

The few people I know of who are successful at trading all have one thing in common, they have an edge. What is an edge? An edge is a technique, or a special insight, or understanding, or technology that sets one apart from the trading hive. Success at trading doesn't flow from the mundane. It is crafted by developing a special skill or approach to trading that is applied in a consistent, disciplined and objective manner.

I got lucky last week with SFE, $1.10 to $1.58 at it's highs, banking a nice chunk of that rise. But I didn't know ahead of time that SFE was a 40% winner. It was just another Insider-Buy, a system trade, that fulfilled all my criteria for buying and as such, the trade was taken. There have been plenty that don't work that well and some that don't work at all. But as my tedious back-testing suggested, most of these I-Buys that meet my criteria for a short-term trade work, so I take them all. That's my edge with I-buys, a way to collect them early in their public dissemination, and way to match them up against my own filters and a way to execute the trade fast, very, very fast.

I haven't talked much about my other techniques, one of which has been my bread and butter trading tool for two years now. It's the one I describe in my profile and I have yet to figure out a way to disclose it here without compromising my edge. Sorry, but only a few of us can get through that door at once.

My point it that these consistently winning trades don't come from watching Jim Cramer or subscribing to Growth Stock Outlook. They come from technique, from a cultivated edge that sets my trades apart from the ordinary and that doesn't rely on luck as much as discipline in attaining success. SFE was lucky, yes, but it was luck that I made happen by acting in concert with my rules for system trades.

So the art of the trade, simply put, is to find something that works and trade it.


Jack Cory said...


I, too, have a very disciplined approach to the market; one very different from that of Allan.

I prefer to trade, long or short, with intermediate trends using suggestions (signals) from various indicators.

There are times, however, when the market seems to give a signal and then violates it - or I just misinterpret the action of the market.

That happened last week when the market collapsed for a few successive days just after I was pretty much convinced of two things: 1. that some distribution was going on during the period of the previous several weeks and 2. that the market would continue moving up in spite of what appeared to be some accumulating overall selling.

Then the market collapsed - and that is where my discipline shows up. I get stopped out.

I am a total believer in "stop loss" trades; most particularly on new positions. In fact, on new positions my stops are often only a half-point under my purchase signal.

If the market does not do what I think it should do I do not bother to reset my thinking at that point - I just get out of the way. I stand aside.

At such moments my trading activity is in concert with something I read in Jesse Livermore's book "Reminiscenes of a Stock Operator" more than 50 years ago: OPINIONS ARE OFTEN WRONG. THE MARKET IS NEVER WRONG.

Anonymous said...

Hi Jack & Allan:

I too, like Jack, make my trading decisions based on the intermediate term trends. Why you may ask? Because I am still a wage slave that only has time to check into the market briefly a few times a day. I can't act quickly enough to manage trades on short term trends.

I actually am commenting here to add that I have been using a stop loss disipline and it has helped me be more successful. On some trades I put the stop loss order in right after the buy order. On some trades I set an alert that tells me when a set price is violated. I watch the trade much more closely during that day for signs of complete collaps (which would prompt me to exit ASAP) and wait for that day's close to see if the price is still below the price I predetermined as my sell point, if so I sell the next day, no questions asked. I use this later strategy with my tighter stop loss targets to avoid intraday jiggyness.

I also use some manual trailing stops, where I raise the stop price as the stock price moves up. This becomes my exit strategy on certain trades as I keep moving the trailing stop up until I get stopped out. Yes I have left money on the table this way, but it seems to work better for me then trying to pick the exit point without stops.


Greg Reiman

Online Trading said...

Good post! There is no point in trading, if you don't know exactly, what you are doing.