Trading Beliefs

Choosing the right stock – part 1

Posted by BMoreTrader on April 22, 2016
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Belief:

Choosing the right stock or market is choosing a proper trading vehicle.

What this means to me:

Choosing the right stock does not make me a trader or guarantee success in the markets. The universe of stocks is large and some have tendencies to gap or move in certain ways that are not helpful or counter to the ideas behind a mechanical trading system.

What this belief gets me into:

I need to know what sort of movement my trading systems are designed to capture.
I need to know if the stock tends to move in a disjunct or smooth manner.
I need to know if the stock has the liquidity or volume to me to trade to meet my objectives.
I need to know if the stock fits the price movement pattern sought by my trading system.
I need some degree of confidence that the stock (market) will exist for the duration of my trade.
This helps me limit my choices of trading vehicles.
I could spend too much time considering which stock rather than how to trade.
Part of designing a trading system must include determining what the requirements are for the stock or market.
Making sure I have tools to examine how a market moves.

What this belief gets me out of:

Ascribing winners or losers to stock selection.
It can keep me from trading markets that don’t fit my system requirements.
Considering how my psychology fits into selecting stocks.
Considering how well my tools for choosing the market work (Do I understand them and am I using them properly?)

Limitations of this belief:

There could be more markets to trade than my span of control will allow me to follow. I may be overwhelmed by the choices. Choosing the right market does not guarantee I will follow my trading rules.

Utility of this belief:

Understanding the way the markets I trade move and elements of their fundamental structure is useful to being a trader.

Conclusions:

This belief seems to only be a partial viewpoint. It needs more refinement or clarification. Both sides of this equivalency statement are very broad. I feel like I haven’t captured what I’m trying to say or need to say with this statement.

Fundamental news can move the market

Posted by BMoreTrader on April 20, 2016
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Belief:

Fundamental news can move the market.

What this means to me:

While price is prime, there are factors from the day to day operation of a business that can change the price.

What this belief gets me into:

I need to have some level of awareness about the underlying business for a stock trade.
Studying fundamental evaluations of a business.
I need to pay attention to earnings announcements (at least their timing).
Looking at the big picture – general economic and business trends.
It could lead me to try to pick stocks with huge potential upcoming moves.
Looking for reasons behind price action.
Listening to mainstream media and following the crowd.
Holding a position until a news event (regardless of price action)

What this belief gets me out of:

Stocks in industries I don’t understand (where dramatic fundamental shifts happen).
It can keep me out of stocks with expected fundamental news events.
Being reliant solely on price.
Honoring my stops (letting a loss grow if price blows through a stop).
Considering the psychological side of trading (mine and the market).
It can keep me from building price based trading systems.

Limitations of this belief:

Looking only at fundamental news can hamper my ability to follow price based stops. It does not capture the psychological side of trading or the market.

Utility of this belief:

Being aware of fundamental news events and trends is useful to choose (or avoid) markets to trade. While markets are engines of psychology, some of the psychology is opinion about the fundamental status of a business.

Conclusions:

I need to be aware of fundamental considerations and events, but can not make this the sole criteria for trading. Any price based trading system needs to also account for potential fundamental news events.

Markets Trend

Posted by BMoreTrader on April 18, 2016
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Belief:

Markets Trend.

What this means to me:

Markets establish a direction (up or down) in which prices will tend to continue over time.

What this belief gets me into:

This will encourage me to build and explore trend-following systems.
I expect to buy high and sell higher (or sell low and buy lower).
I expect to have multiple losers for every winner.
False breakout entries.
Trades that are in the red after entry but then continue as expected.
Looking to catch the meat in the middle of a move.
Need to define a way to identify a trend or start of trending behavior.
Looking at longer term trades (multiple bars of the time frame considered).
Exploring different markets.
Considering big picture (fundamental) ideas.
A way to classify markets: trending up, trending down, not trending.

What this belief gets me out of:

Picking bottoms or tops.
Following trends may keep me out of sideways markets.
If there is no trend, I may not be in the market at all.
A high win percentage for the system.
Concentrating on prices (trends) could distract me from psychological work.

Limitations of this belief:

Markets are not always trending. Looking for trends in a sideways market is bad for my account balance and bad for my personal psychology. I will need to give back profits before exiting a trade. I need to have reentry rules for both change of direction and continuation patterns. It could limit my ability to trade in a sideways market. No specific time frame is required, so any classification of market by trend needs to match the expected trade time frame. (A market could be long term up and short term down.)

Utility of this belief:

This will enable me to develop a way to classify markets: up, down or sideways (none). Having suffered losses when trying to pick bottoms (or tops), it is useful to keep me trading in the direction of the (longer-term) trend.

Conclusions:

While this belief is a key for making sense of prices in the market, it raises many more questions. Time frame is important in determining trend. What do I need to see happen to believe a trend exists? How far must price move to reverse the direction of a trend? What identifies a non-trending (sideways) market?

Price is Prime

Posted by BMoreTrader on April 18, 2016
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Belief:

Price is prime.

What this means to me:

The efficient market hypothesis is based upon the idea that all current relevant information is reflected in the price. Prices change for fundamental business reasons but also for the psychological reasons of investors. The only way to capture both the fundamental and psychological dynamics of the market is through the trade price.

What this belief gets me into:

This belief allows me to build trading systems based upon price action.
I can use indicators based on price to determine markets to trade.
I can use price indicators to determine when to enter a trade.
I can used price indicators to determine when to exit a trade.
I can use price action to determine my reward:risk ratio for a trade.
I can limit my losses according to price.
This will allow me to build mechanical systems that can be automated to execute trades for me.
I can trade many different markets.

What this belief gets me out of:

I am not required to analyze business balance sheets.
I do not need to pay as much attention to fundamental news.
I don’t need to spend hours on fundamental research to pick the right stock.
I may not need to know anything about the business itself at all.
I don’t need to find a reason why prices move.
Looking at the big picture.

Limitations of this belief:

Fundamental news can drastically alter the price of a stock (think pharmaceutical and bio-tech companies and drug approvals).
If I only look at price, I could miss important news announcements (earnings).
Bad price prints could force me out of (or into) a trade prematurely.
Relying only on price could lead to curve-fitting when backtesting.
I could miss out on stocks that represent extreme value (from a fundamental perspective).
Price relationships could be identified that do not make logical sense.

Utility of this belief:

By placing price first, it enables me to screen for markets meeting certain conditions, establish trade parameters for entry, exit and reward:risk, and simplifies (automates?) the decision making process. Combined with a healthy awareness of the big picture and fundamental news events, this is an extremely useful belief for me.

Conclusions:

Price reflects both fundamental and psychological opinion of the apparent value of an investment. Building a trading system around price movement allows for the creation of clear systematic rules to follow (or program). Profits and losses result from changes in the price after a position is entered. Trading is only a possible income source if prices change.