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Winning Traders Base Aggression Level on Market Conditions and Feel

Pete Renzulli
Jan 5, 2012, 4:27 PM

It’s what we are all striving for, more money. Why does it seem to be so elusive for many traders? I am not talking about earning money for the week; I am talking about getting PAID month after month. I am talking about writing your mortgage payment or rent check from your trading business.


We have all had the periods where we go on a positive streak and we are feeling good about ourselves. Then for whatever reason the wheels fall off the train. Any trader who has been involved for a decent amount of time will tell you that most trades balance each other out, you have some winners and you have some losers and on average they net each other.


That leaves us with the OTHER TRADES; the big losers and the big winners.  Now don’t get me wrong I am not talking about all or nothing trading. I am talking about controlling the downside and maximizing your upside. I am talking about a day you should not risk more but you do, I am talking about when everything “lines up” and you don’t get bigger.


More specifically understand how to plan to trade them both. Let’s face it, we would all like to have a smooth stream of nice winners without too much risk but we both know that is Fantasy Island.


Far too often one bad trade turns into a really bad day, one that exceeds your planned max daily loss limit. We have all done it, if you say you haven’t you are full of beans. Controlling this type of day first comes from learning how to recognize it. The most common comment is “How do I tell it’s happening when it’s happening so I stop!?”

One answer is to pay attention to how you feel on consecutive trades when you get filled. Do you feel you need to watch every print because the tape is sloppy and you quickly have every position move against you or do you get filled on limit orders and the trades are just flowing off your fingertips without a care in the world? If you feel like you couldn’t hit water if you fell out of a boat, lower your risk or step away. Get the tough day under control.


The opposite scenario and one that in my opinion that gets overlooked too often is one that you should have earned more; one where your trading plan and your game plan lined up perfectly and for whatever reason you book quick profits instead of holding the good trades longer and getting bigger. In this case the extra risk is justified.  How do you “know” it’s a day where more is available while it is unfolding?


You need to know how to build an argument for a great idea. The stronger the idea and or the overall environment the higher the trade expectation. I define trade expectation as the probability for follow through.  If you don’t know this intuitively you need to build a checklist until it becomes a feel. How do you think high frequency traders earn money so consistently? They have a list of criteria and weigh the criteria in terms of impact on their edge.


I will walk you through how I do it so you can build your own method (or even copy the one I use).


Essentially I break it down into a pyramid of expectation, in my mind the bottom rung or the “base is the broad bases market. One tier higher is a specific sector and above that is stock specific. What I am looking for or observing is “how solid is the foundation behind my trading idea?


If the broad based market has a clear direction that means a lot of money is doing the same thing, there is an agreed upon general opinion for the day. If the top stocks in a particular sector or industry are in sync with the big picture my trade expectation goes higher.


So to put it into a “system” it would be as follows: If I am trading a stock that is obvious but the sector and the broad market are not obvious or in sync with my idea I may have a good idea.


If my stock specific idea is in sync with a clear direction in the leaders in that sector I have a better idea so trade expectation increases and I would have a “better” scenario.


If all three are in sync I would have “best” unfolding and now have good reason to trade a little more aggressively. Don’t forget we just walked through expectation, the probability. You can have everything line up and still not earn money on the idea. That’s OK because you did what you were supposed to do. That is more important in the long run.


So if we go back to visualize the pyramid, if you only have the top of the pyramid in play you do not have a solid foundation behind the idea, the more obvious the foundation, the better the trade expectation. Give this method a shot and I am confident, at the very least you will start to be much more conscious of the type of environment you are in hopefully will begin to adjust your trade expectations accordingly instead of just attacking each trade and day with the same expectation. Every day is not the same.


This of course all assumes you have a clear picture of what your edge is. Recognize and control the tough days, capitalize on the best days.


*DISCLOSURES: No relevant positions