What works now

Lotus

— 3 min read

Been looking at my equity curve, and can't shake the feeling that it's mostly just luck. Assuming it's not, however, that could mean that this is the year I finally reached a sort of tipping point where the total output of my good behaviour is enough to offset the total cost of my stupid mistakes in a meaningful way. I think it would be a good idea to write down some observations about what works for me now, so I can look back on it in the future.

Some of my trading observations

  • Look for confluence (i.e. multiple factors so support the trade). This could be technicals on multiple time frames, valuation (P/CF or P/E), a catalyst (i.e. news flow or major new macro event supporting the trade), extreme market sentiment (in the general market, the sector, or the underlying commodity), etc
    • More confluence - size bigger
    • Less confluence - size smaller (e.g. if I see a nice chart, but fundamentals or support from theme is not there)
  • Good charts help. Good charts with good stories/fundamentals even more so.
  • Weekly charts help cut out a lot of noise, but daily (and intraday) charts often better for more precise entries with tighter stops
  • Don't write off a name/theme because of a breakdown in technicals. Keep a long list, and review frequently. I am still really bad at this, and have come to realize a lot of missed opportunities are here.
  • Don't fight the trend, and don't try to pick the top. I am not good at this, and have found that it's easier to just reduce exposure.
  • Overcome fear of closing out slow moving trades. I almost always feel better after I move these positions to cash, instead of watching them move sideways.
  • Patience when entering - when a name pulls back a lot, it can always pull back more. Wait for technical confirmation that there is buying support before entering. Taking a position before giving support a chance to build often results in me getting stopped out, and I give up capital unnecessarily.
  • Shake out bars also happen so much more than I consciously acknowledge, and I find very often the steps are: wait for base > enter > shake out bar stops me out > continues to hold base > price moves higher.
  • Use stops regardless of size, conviction, or type of trade. Only trades I may not use stops for are for very small starter positions (<1%) in names I want to appear in my portfolio for tracking purposes, but I am also beginning to feel this is not necessary.
  • My trading style does not require me to watch too closely when the session is open, but when I do, I am more able to find opportunities with tighter stops, which provides better risk/reward. Key here is balance to know when I need to sit on my hands and when I should be watching the market more closely.
  • Trim on the way up. Hardest part about this is fear that it will double or more from the exit point. To overcome this, I do 2 things (1) keep a portion of the trade on to get stopped out at significant levels or moving averages, and (2) keep reminding myself that there are always new trades with better R/R to move on to.
  • Options (long calls)
    • Avoid < 6 months expiry (unless there is a very strong underlying theme currently in play)
    • Rule for myself: no more than 10% of portfolio in options, with exposure actually closer to 5% most of the time.
    • Close out profits fast (given nature of options, waiting for bigger moves has often resulted in round tripping and ending up with a loss)
  • Avoid event driven trades - a lot of people write convincing stories, but there is often more complexity and moving parts to business deals than an uninvolved person can imagine. I have no edge here.
  • Never enter trades based on tips / rumors / supposed inside information.

There are probably more, but these are a few that come to mind straight away.

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