Thursday, January 29, 2015

Best Practices in Trading: Finding and Focusing on Your Trading Edge

Two kinds of traders fail to find success:  those who cannot change and adapt and those who cannot focus and exploit their edges in markets.  Very often traders become frustrated with losses and abandon what they are doing, seeking ever better ideas and methods.  This makes it very difficult to ever master any particular opportunity or skill set in markets.

Today's best practice submission comes from David Blair (@crosshairtrader).  Readers will recognize him from the CrosshairsTrader site and blog.  David's best practice is all about focus:  eliminating what is non-essential in markets and developing a very specific market edge and expertise:

"When I first started trading I decided to be a sponge, soaking up all the stock market information I could, free or otherwise.  After sponging it for a few years I realized I created a monster devoid of creativity; replaced by anxiety, confusion, fear, and impatience, all of which were a result of a lack of focus.  I traveled in a black hole with a flashlight and didn't know it.

During these years I was trading with a partner:  a friend who introduced me to the business.  Each day he would have a new topic for us to study.  As a result, our trading room began to look like a war room.  8 monitors, two big screen TVs, 2 color printers for printing charts, cases of books, CDs, seminar manuals, etc.  The problem was, the more we added, the worse our performance, the worse our performance, the more we added, creating a vicious cycle of spoiled intentions.  As my partner continued to add, I began to subtract.  I began practicing minimalism by getting rid of all the things I thought were so important, realizing that stock prices cannot be predicted no matter how much I learned or added to my charts.

My process now involves a very simple, easy to understand price pattern wherein I look for stocks breaking from price boxes to either 1) continue the previous trend or 2) reverse the previous trend.  I have a well defined method for locating these trades when they trigger on two time frames, the weekly and daily.  I have prepared a watch list of stocks and have developed indicators specifically designed to alert me when there is a potential trade opportunity.  In other words, I have become a 'process specialist'.  I have developed a specific process that helps me manage the uncertainty of future stock prices.  I no longer feel the need to study everything or watch anything other than the stocks on my watch list."

David's methodology makes sense:  stocks trading in a box are ones that have consolidated.  Both directionality and volatility have gone to reduced levels.  He is identifying opportunities in which breakouts place him on the right side of both direction and volatility.  This not only means that the market moves his way, but moves his way with impulsivity.  Psychologically, having a specific methodology like this reduces distraction and enables a trader to become a true specialist, building skills in a particular kind of trading.  Perhaps most important of all, specializing in a type of trading enables David to make trades truly his own, so that he will have the confidence to act--and also has the perspective to quickly recognize when setups are not working.  

Many successful physicians are not only specialists but sub-specialists.  They find their "edge" by knowing one area in great depth.  This can be a very helpful approach for traders as well.

Further Reading:  Fallible Edges in Markets