Friday, February 26, 2010

Five Lessons From Recent Trading

Just a few reflections on my own trading that might be of relevance to readers:

1) So much of my edge is not needing to trade. I had a long bias going into this morning's trade, saw the early weakness on the numbers, and also saw the likelihood of a range day. Still, things weren't lining up the way I wanted. I was trading from home and said to myself that I just wouldn't be placing any trades. I was satisfied with my week's performance and didn't need to put trades on if I didn't see anything. I went into the kitchen, petted Gina (who was patiently waiting for me), and took one last look at the screen. That's when things lined up at 9:14 AM CT, I bought the S&P, and took three points to the good with no heat whatsoever. No way I make that trade if I hadn't been willing to not trade.

2) Just make the good trade. The folks at SMB talk about making "one good trade". There's a lot of wisdom in that. I *know* the feeling of when everything lines up for a good trade. If I'm patient and wait for that feeling, the results take care of themselves. When I'm thinking about the profit potential of trade (or how much it could lose), I'm lost. I'm no longer *in* the market, even though I may be in a trade.

3) Everyone's overleveraged. It sounds like an overstatement, but the more I interact with traders, the more I see it's true. Leveraged traders can't take much heat, and so everyone scrambles in and out of positions when levels are broken. If you can see where the overleveraged traders are overcommitted, you can make good money from their scrambles for the exits.

4) Learn from winning trades. If the good trades--those that line up for me, are made with conviction, and bring little heat--are on the long side or short side, that says something about the market. The really good trades usually are in the direction the market wants to move. If I'm thinking bearish but making money on the long side, that tells me something important.

5) Execution matters. I really don't like most technical indicators. Recently, however, I've been overlaying a simple, short-term oscillator on my charts. If the oscillator is near a low, I'm not allowed to sell; if it's near a high, I'm not allowed to buy. It's moronically simple, but it's saved me considerable money. Buying dips in rising markets and selling bounces in falling ones beats chasing highs and lows over time.