2/9/25 - Once we identify an A+ opportunity, we've only begun to exploit its potential. By tracking short-term action where buyers/sellers cannot move the market to new highs/lows (the inefficiency pattern mentioned below), we have potential entry points with solid reward relative to risk. If the inefficiency patterns break for some reason, we can exit quickly when the market makes a new relative high/low. Because we're overbought/oversold over multiple time frames, the potential reward is significantly greater than the risk.
Still, this leaves us with two crucial aspects of the trade: *what* we trade and the sizing of our positions. We're looking for instruments that show clear overbought/oversold levels at the multiple time frames and we're looking for instruments that are moving most between these overbought and oversold levels. In other words, we look for what is trading: 1) cleanest and 2) what is moving the most.
With respect to sizing, every subsequent inefficiency (selling that can't move the market to sequential lows; buying that can't move us above our most recent peaks) becomes an opportunity to add to the position. When we hit overbought/oversold levels at the three periods mentioned below, we have opportunities to take profits. What this means in practice is that, early in the unfolding of the opportunity, we're sizing up and, as the pattern is working out and we are moving to overbought/oversold levels on the three time frames, we're taking profits. Position management is every bit as important to profitability as the timing of entries and the selection of trade setups. By taking profits quickly when we hit first levels of overbought/oversold on the adaptive moving average measures and moving our stops accordingly, we generate fresh risk/reward. Too often, traders focus on entries, less on exits, and very little on dynamic trade management and *what* to trade. If profitability were simply a function of the setup, it would be easy to automate the setup pattern and make money consistently. It's how we select opportunities and what we do with them that defines our success.
2/7/25 - Two ideas go into an A+ opportunity in my own trading. The first is a lining up of time frames. As I've shared in the past, following the work of Marcos Lopez de Prado, I construct my charts on event time, not chronological time. These charts utilize open-high-low-close, but the bars represent an amount of volume traded, not units of time. For instance, with the MES contract, I follow three periods, with bars of 5000, 15,000, and 50,000 contracts traded. Each chart then tracks overbought and oversold levels based upon the adaptive moving averages created by John Ehlers. These averages track crossovers of short- and longer-term lines, but the lines adjust their speed based upon how markets are moving at that time. When we have all three event time periods oversold at once or overbought at once, we have a lining up of time frames. Trade opportunities may present themselves based upon overbought/oversold levels of individual adaptive moving averages at a particular event time period, but the A+ opportunities occur when we're stretched at multiple periods.
The second thing I look for once the market is stretched across periods is what I call inefficiency. I use indicators of buying and selling pressure, such as the NYSE TICK, to tell me what traders are doing in real time. When we see buying/selling pressure that cannot move the market higher/lower, that tells us that the buyers/sellers have become exhausted. Their buying/selling is being absorbed by larger market participants.
When we see buying/selling inefficiency in markets that are stretched on multiple time frames, the ingredients are there for major unwinds. I want to take advantage of the buyers/sellers who are trapped. Because a large amount of volume is trapped, as measured by the volume bars, the resulting move is generally significant--not a quick scalp. My experience is that the batting average on these trades when all the variables line up is quite high. In my next post, I'll outline ways of making the most from these A+ opportunities.
The key here is to find a way of understanding market action that makes sense to you and that plays into your information processing and personality strengths. When you trade the unique patterns that reflect your best understanding of markets, you can then achieve unique returns.
2/6/25 - What goes into an A+ trade for one trader is often quite different from what goes into the best trades for others. This is because each of us brings unique talents to markets and varied skills that help us make us of these talents. Studying your best trades over a period of time can help you figure out how you best detect and exploit opportunity. Too often, developing traders are interested in trading and making money and not interested enough in figuring out who they are in markets and what they do well. Those traders have emotional disruptions of their trading, not because they are so emotionally troubled, but because they are pursuing something important to them without drawing upon their greatest strengths. The best way to be calm, focused, and secure in trading is to stay connected to what we do really well. That is what ultimately gives us the energy and enthusiasm to persevere and succeed. What do you see most clearly in markets? What interests you the most in trading? What are you doing well when you're making money? What kind of markets bring you the greatest opportunity? In relationships, we date before we commit. It makes sense to date markets--try out different markets and styles of trading--before figuring out what you will commit yourself to. Premature commitments yield failed marriages--in all areas of life. Next, I'll share what I do best and worst as an illustration of building trading success on what we do most successfully--
Over the years, I've been struck by how many top performing discretionary traders don't have win percentages of much over 50%. Most of their trades are relatively small winners and relatively small losers. They are *very* good at risk management and so they have very few large losers. But they are also good at recognizing their best opportunities--what we might call their A+ trades--and making the most of these. In his book One Good Trade, Mike Bellafiore of SMB Capital stresses that, "Consistently profitable traders obsess about making One Good Trade and not money. Your job is to make One Good Trade and then One Good Trade and then One Good Trade" (p. 31).From this perspective, One Good Trade includes losing trades that one manages well. One Good Trade also refers to profitable trades that follow one's trading rules. If my above observation is correct, however, trading success also requires awareness of One Great Trade: one's A+ opportunity. It's the relatively few big winning trades that account for the difference between most good traders and the great ones. It's the (all too rare) combination of disciplined risk management and aggressive pursuit of special opportunities that define the great trader.
Having met with many traders over the years, I can confidently say that the great majority don't know--in detail--what goes into One Great Trade. They might have a sense for good opportunities, which they might call A trades, but they haven't truly studied their A+ trades: those few trades in a month or year that account for a large share of total profitability. What goes into an A+ trading opportunity? If you don't study those One Great Trade occasions in detail, replaying them and analyzing them intensively, how can you find the conviction to pursue them with aggressiveness?
I've been studying my own A+ trades and opportunities and will share them in an update to this post. But my unique opportunities are unlikely to be yours. Anything great cannot be copied from someone else, whether it's a painting, musical work, or writing. The odds are good that your A+ opportunities are hiding in plain sight. They are among your standout winners, even though you may not have fully exploited their potential. Much of the time, we become so immersed in solving trading problems and controlling trading emotions that we never fully study our trading strengths.
One Good Trade keeps you in the game and can make you consistently profitable. If you can identify One Great Trade, you'll have a template for success that you can build upon.
More to come.
Further Reading:
Finding Our Greatness
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