2014年8月15日星期五

Trading ecosystem

I always want to write something about an over-all picture. Trading is a very complex systems. I saw of people or some guru on the web only talk about individual stock pick. The individual pick is nothing unless you fully understand the strategy or setups behind it.  A lot of strategy can be found in public domain, most of them are proved working. But truth is studying a setup and turn it into consistent profit is still very difficult. Why? That is because beyond setups, there is entire ecosystem. Unless get perfection on every aspect in the system, you are unlikely to be successful.

(1) Market timing
Market timing tool is needed to do situation awareness. It will tell you when to be aggressive and when to be cautious. Be greedy when most people fear and be fear when most people be greedy - this is some kind of market timing. It tells you extreme bullish or extreme bearish will lead to market turn.
    If you study all the market timing method, you will get the conclusion that market breath is best market timing system. It beats value based, money flow based or velocity based system. Why? Because the breath number is the direct market information tell you what exactly is extreme bullish and what exactly is extreme bearish.

(2) Setups
A complete setup should include: stock selection, entry point, stop, exit, time frame.
    A good setup is built on endure edge. The best edge that available since market exist is: One-momentum and Two-post earning announcement drift. This edge has been there for a hundred years and like to continue work in our life time.
    Endure edge is not change but tactics are keep changing. Also how the setup works is affected by general market. That is why market timing is important.

(3) Risk management
Risk management is important. Otherwise sooner or later you will blow up your account. This first thing in trading is to protect your capital then let the market decide the profit. If you have a good system, it will come to you.
    Risk management is in line with setup. Some swing setups, you risk small and profit small. You will do a lot of tradings per year to significant change your account while drawn down is well controlled. (%R is better risk system than fix percentage of account or fix shares). Some kind of position tradings, you risk significant higher, just one trading can double triple your account. But you need very high conviction level and high successful rate. Even that, you will still see some big dawn downs.

(4) Believe system and psychology
Believe affect behavior. People do things they believe is true. If you believe efficient market theory and there is no edge available at all. Then you do not even bother trading. In order to be a successful trader, you need to un-install the believe that does not work and install the believe that works. Believe and psychology is another extended topic. But it is not that mysterious as some people say.

(5) Process flow
If you look at daily chart, you should have a daily process flow. If you look at weekly chart, you should have a weekly process flow.
    If you do not have a process flow, you will just react to whatever information comes to you first and lower the significance of later information. A process flow give you systematic way to find opportunities.
    This is extreme important at early trading career to built up procedure memory in order to remove cognitive load. People emphasize trading psychology issue, this can be conquered by doing process flow. If you keep doing same thing over and over, it will become part of your nature.
    This is the exact reason I am posting my daily routine in public.

As you can see, trading system is very complex. The best way to learn trading is first divide it to several simpler task (like the 5 items above), get expertise on each task then keep practice the entire system. This is no magic or secret of most successful traders. They all have a dark period they do not want to mention. Build the procedural memory is the key, it need thousands of hours with correct systems (if you did not spend time study and pick wrong system - it is like a doctor think brain is in chest or heart is in ass, no one will stop you from losing money) in order to get expertise on every aspect of trading ecosystem.


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