Tuesday, June 21, 2016

How most traders trade without an edge and don't even know it


There are two mistakes most traders make when building a basket of trading setups.

1. They trade setups without and edge.
2. They trade the setup in the wrong market.

Your trading "edge" gives you a reliable idea of how much you can expect to win with your setup over time. A well tested setup gives you a a predictable probability rate.

This seems counter to my article titled "the fallacy of backtesting".

It is not.

While I find backtesting in the way most do it a waste of time, it is not because the past is not reliable. It is because most do not backtest correctly.

Most backtests plug in the parameters of the setup and test over a given period of time. This type of unrigorious testing is worthless.

To properly test a setup you must account for how a setup reacts to different markets.

A common trading cliche is that 70 percent of a stock's move is related to the market and it's sector.

If  gold is getting crushed odds are so will the gold related stock you are trading, regardless of the setup.

I wouldn't touch a breakdown short setup in a ramping market.

So you decide to test breakdown setups going back 7 years. I'm willing to bet your stats for this setup will be horrible, considering the market has gone up over that time frame. You'll think the setup is worthless and discard it.

However, now test for that setup when the market is below it's 50 day moving average and you might have something.

Never forget how important the market and sector is to the stock you are trading. As a swing trader, you are not just trading stocks and setups. You must be in tune to the market and sector you are trading.



If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up at BullsonWallStreet.com

Friday, June 03, 2016

Smart traders profit from the wisdom and delusions of the crowd


Crowds can be wise, but also manic and delusional. An astute trader learns to differentiate between these two extremes.

When there is diversity of opinion, the crowd is a force. The parts think independently, but private judgements combine to join as one powerfully wise collective.

Unfortunately this intellectual juggernaught will not last forever.

At some point diversity gives way to homogeny. Diverse thinkers conform to the will of the group. The smartest person takes the lead, which leads to less variance of opinion and acquisition of knowledge. The group no longer leads, but follows with irrational cognition as crowd psychology takes over the group.

The group is now set up for "popular delusions" and "madness of crowds".

Bubbles form that inevitably pop.

We have seen this play out for centuries. What startsas wise investing turns into a mania. Examples are too numerous to list, but here are a few:


  • 1700s Tulip Mania: at one point tulips were more valuable than gold
  • 1700s South Sea and Mississippi Company Bubbles: These companies were with more than 80 times all of the gold and silver in France.
  • 1927 Florida Housing Bubble: A 2 bedroom condo in 1926 cost as much as a large luxury home in Miami today (4.5 million *without* adjusting for inflation)
  • 2002 DotCome Crash: Nasdaq lost 78 percent of it's value in 18 months.
  • 2009 Housing Bubble and Credit Crisis: Credit and housing mania leads to 50 percent loss in the market in 18 months.
In all of these instances, what started as smart, logical and prudent investing trends gave way to the insanity of the crowd.

Your job as a trader is to identify when wise crowd logic gives way to delusion.




If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up at BullsonWallStreet.com

Wednesday, May 11, 2016

Only a fool accepts widely held trading maxims

Trading maxims that are treated as gospel, but nobody actually investigates their accuracy.

Why do we implement them into our trading plans without investigating? 

It is because we are sheep, and it's easier to be a follower.

Successful traders think like wolves and never follow the herd. In fact, they avoid the herd like it's the plague.

Last summer I realized I had spent my entire trading career as a sheep in wolves clothing when it came to risk management.

For years I had steadfastly held on to the belief that you must get 2:1 on every single trade. After getting stopped out of a number of trades that initially went my way I decided to investigate the 2:1 mantra.

My research was enlightening and totally changed my attitude towards risk management and probability trading. It showed that had I taken on 1.3:1 risk instead of 2:1in rangebound markets, I would have increased my profits and win rate.

I am no longer mislead by this false risk management "truth".

Let this be an important lesson. Never accept strategies that the herd adopts and investigate everything, no matter how nice it sounds.


If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up at BullsonWallStreet.com

Thursday, April 28, 2016

It's the small wins that hurt

This is what holds many traders back.

The small wins.

Yet we love to take those small wins, and avoid small meaningless losses like the plague.

We are afraid of losses. It doesn't matter it it is big or small, that L is scary.

It's all about the fear of the loss.

Here is the rub: the fear of the loss is always worse than the loss itself.

Losses don't hurt as bad as you think.

Remember what it was like getting a shot when you were 10 years old? That drive to the doctor was terrifying. But then you turn your head, feel that little jab, and it's over and you wonder what you were so scared about.

Trading losses are the same.

Not only are losses not so bad, but often it means you are trading correctly.

I embrace small losses.

The reason is small losses combined with big wins means you are doing something right. On the other hand, small wins mean you are doing something wrong.

It's the small wins that hurt.




If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up at BullsonWallStreet.com

Saturday, April 16, 2016

Don't choose unhappiness over uncertainty

It's a flaw in our brilliant minds and one that afflicts most traders. It's a big reason why 90 percent of traders fail.

I'm watching one of my students trade a few weeks ago and he keeps taking these ridiculously small wins. Over and over again, he takes these small .3R gains only to watch the stock run without him. I don't say a word and just watch.

He is in agony.

I mean it looks like he has literally been slapped in the face. Finally I ask him why he keeps taking these small losses.

His response is priceless (actually it's costly):

I don't know what is going to happen so I'm protecting my profit.

And there you have it.

We are wired to choose unhappiness over uncertainty.

This novice trader knows he can't succeed continually taking these small wins since two regular size losses will wipe them all out. That's why he's unhappy about it. Yet he can't control himself.

He's inflicted with the uncertainty disease, feeling more discomfort with uncertainty than unhappiness.

Fight your programming and embrace uncertainty.

It's the only way you succeed.

Uncertainty is the way.





If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up at BullsonWallStreet.com

Monday, April 04, 2016

Subtract Your Way To Trading Success

Swing Trading Master
So you know about swing trading breakouts . . . fantastic. You can make a lot of money trading those.

So you know about stochastics . . . that's great. Extreme conditions lead to extreme profits.

So you trading using Fibonacci retracements . . . awesome. I know a guy who makes a killing off this mysterious phenomena.

So you know about trading options . . . brilliant. There are some rich options traders.

So you know how to trade divergences . . . excellent. In 2008 this style was a personal gold mine.

So you know how to trade multiple timeframes . . . magnificent. My buddy kills it by looking at three different time frame charts.

So you know how to use Level 2 . . .superb. Lots of money can be made gaming the algos.

So you know how to trade breakouts using options when stochastics are oversold, while analyzing Fibonacci retracement levels when there is a divergence, everything aligns on multiple timeframes and level 2 shows support.

WTF?

You know a lot of things, but you don't know anything.

Master a few things by subtracting your way to success.




If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up at BullsonWallStreet.com.

Thursday, March 31, 2016

Define yourself as a trader

We can choose to define ourselves as traders by the trades we take.

This is not about the money we make.

Rather it's the place within the setup that we enter.

Do you require more confirmation, content to give up some gain in exchange for safety?

Or do you jump in early, aggressively jumping in pre-breakout in order to maximize every inch of the trade?

One is not better than the other.

However, you must know which type of trader you are and adjust your trading style, risk management and expectations accordingly.

Define yourself as a trader.



If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up at BullsonWallStreet.com.