On the discretionary side of trading, it is especially difficult to recognize those with an edge, as audited track records and detailed performance metrics are rarely available to the trading public. Over the past couple of months, however, I have played market sociologist and used posts to Stock Twits, as well as material published on websites, to identify what active and experienced market participants are doing. Several of these discretionary participants are actively involved in the training of traders: these include AlphaTrends, Crosshairs Trader, and SMB Training.
(Note: none of these enterprises are aware that I am writing about them; none solicited my post and I have not accepted--nor would accept--any compensation or promotional consideration for mentioning them in the blog. I've focused on them because I have interacted with each of them in the past and found them to be serious about what they do. They have been doing this for a while, have an extensive history of posting ideas to StockTwits, and have gained a substantial number of followers. All put significant work into their market activity, creating and posting videos and offering specific trading ideas in real time. I know some traders look askance upon those who charge fees for educational services--"those who can't do, teach"--and Lord knows there are some sketchy providers out there. One advantage of a platform like StockTwits is that it provides a track record of idea-related productivity and the value of such ideas to a trading community.)
So what are common elements in the strategic edge sought by these discretionary stock traders? I observe several:
1) A discipline of pre-market preparation: All emphasize the importance of process and preparation: sticking to what you do best and being prepared for fresh opportunity--and threat--each market day.
2) Selectivity: All have some methods for screening stocks and focusing on a core group that offer opportunity. Often, these screens focus on stocks that are trading actively, that show good movement, and that are setting up for directional price moves because of earnings reports, breakout patterns, etc.
3) Patience: This follows from the first two. The experienced traders emphasize risk management and waiting for high quality trades, rather than overtrading. All stress understanding the current market environment and adapting to it.
4) Diversification: These traders don't focus on one or two opportunities, but look at a range of promising shares and setups and trade more than one thing at a time. All the proverbial eggs are not in one basket.
5) Simplicity: My sense is that the traders are focused on understanding what is happening now, not predicting what will happen in the future. If I had to guess, I'd say that they are talented in detecting the flow of activity in and out of shares and are riding moves as they are getting under way. They don't appear to be researching deep value and holding for long periods to wait for that value to be realized.
So much of this kind of market edge boils down to pattern recognition, and so much of pattern recognition boils down to practice and immersion in markets. This may be why the traders I selected all make extensive use of videos in their training: they are attempting to hasten learning curves by providing more practice time in pattern recognition.
Having observed the tweets and posts of these and other traders in the StockTwits community, I'm left with the question of testing and systematizing some of the elements that they are using for decision-making. Would adding a backtested component to the discretionary pattern recognition aid selectivity and trading results or would it interfere with a process that is largely implicit and intuitive? There are considerable promises--and pitfalls--associated with such hybrid trading, but it is a direction I see many skilled traders taking in the money management world.
Further Reading: Implicit Learning and Trading Performance
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