Trading Software and Books Reviews

Trading Markets Philosophy

Trading Markets Philosophy

The TradingMarkets Philosophy is to buy on weakness and sell into strength. This type of trading is known as swing-trading and pullback trading.

What is a pullback?

It’s simply a stock that has pulled back off its highs and is trading lower than it was a few days ago. Much has been written on this type of trading, as it is very popular. The problem with a great deal of the information that’s out there is that it’s not quantified. Meaning, people will say “buy on a pullback” without exactly defining what that pullback is and what the edge is in buying at that time.

In this course, we’ll define exact pullbacks and discuss the edges for these pullbacks.

The Best Pullbacks

There are three types of pullbacks that you should understand as you are developing this trading approach. As mentioned earlier, they are shallow pullbacks, mid-level pullbacks and deep pullbacks. Each has pluses and minuses to them, and in the next three lessons we will look at them more closely.

In the perfect world, we want to allocate capital to trading all three types of pullbacks, and we want to be able to know what the edge has been in these pullbacks. By “edge” we mean what is the average gain per trade using a specific exit and what percentage of the time it has been correct. There are, of course, no guarantees this is how it will play out in the future, but it gives us a good idea about how these stocks behaved in the past.

Much of our testing is done from a database of over 8.5 million trades going back to 1995. We like to test large amounts of data, as it gives us further confidence that the findings are real. Many times, you’ll see on television or read in a publication that whenever the market has done something in the past, it has risen or dropped a certain amount of time in the future. Unfortunately, the person telling you this will likely be talking about something that happened 5 or 10 times. When you hear this information, it’s probably meaningless. Why? Because there aren’t enough occurrences to be statistically significant – ideally you want to look at events that have occurred hundreds, if not thousands of times. That way you can get a feel of whether the behavior is consistent over a longer period of time.

Edges

We’ll also teach you about edges and the types of edges you should be trying to find.

If you study all stocks traded from 1995 and then look ahead five days, you’ll see that the average gain has been about 0.25% per stock over that period of time. This is our baseline. Can we find stocks that have done better than this?

The answer is yes – all you have to do is look at stocks that closed at a 10-day low and were above their 200-day simple moving average. These stocks have risen more than 2 ½ times greater over five days versus all stocks (on the opposite end of the spectrum are stocks which have made 10-day highs; these stocks have performed worse than the entire universe over the next five days).

What you start to see is that larger edges can be found in stocks that are trading down (pull backs) versus stocks which have shown strength. This has been shown over and over again in our studies going back more than a decade.

The moral of this is that buying pullbacks is a superior trading strategy to buying breakouts, at least over the very short-term.

Exits and Locking in Gains

Entering stocks with edges is important, but just as important is properly exiting a stock. We always want to be selling into strength.

The academic world calls this “reversion to the mean” trading. In other parts of the trading world it’s also know as “feeding the ducks when they are quacking”. A good friend of ours is a former market maker for a major Wall Street firm, and he told us he made the most money “feeding the ducks when they are quacking”.

As you will learn, when a stock is rallying, the ducks are usually quacking, that’s the time to be selling your positions and many times locking in your gains. We’ll look at optimal selling points, including using the 5-period simple moving average, along with looking at the 2-period RSI as systematic exit points. Each offer significant edges versus guessing when to exit a position.

By the time you’re done with this course, the guesswork should no longer exist for when to lock in gains.

Protecting Your Edges

We’ll also discuss how to lessen our risk when trading. We’ll look at hedging from market risk and ways to lessen sector and corporate risk. The more we can protect ourselves from this risk, the greater our chances for success become.

Trading Systematically

The majority of our trading is systematic, meaning there is a specific plan in place, and this plan is executed each day. This means we know which stocks we are going to buy, at what price, what percentage of our portfolio is allocated to these stocks, and where to exit and when to exit. We also have a game plan that looks at market, sector and corporate risk.

This is known as model driven trading. It’s not only the way some of the biggest and best hedge funds and trading firms trade, it’s the way many successful individual traders trade.

In this course, you’ll be able to use this information in any manner you like, including trading with it in a discretionary manner. But, in its truest form you will likely be able to maximize this knowledge in a systematic manner, which allows you to trade only a few minutes a day. You simply get the set-ups for the upcoming day and place your orders with your broker and then you’re done. Not only is this more efficient, it’s also less emotional.

Trading Psychology

We’ll discuss emotion and psychology in the final part of the course. Many books have been written on this topic, and it’s of utmost importance in executing your game plan.

By the time you’ve completed this course, you will understand when to buy a stock, when to exit, how to protect yourself and why it’s important to use the same approach day after day.

Trading Markets

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