All successful investors must have some type of “edge”. If you don’t know what yours is, odds are you don’t have one.
Not long ago, I heard an address by Ben Bernanke, the former Fed Chairman, who said, “it’s not illegal to make stupid investments.” I submit to you that without an edge, you are indeed more likely to do exactly that.
I’ll describe mine. In my book, the word “edge” is a verb. It’s evolved over the past 25 years and it’s proven to be sustainable through all market cycles as it’s weathered the decades nicely. It’s my trading plan. It’s a durable system with a margin of safety that has effectively mitigated risk and produced consistent profits.
So, what does a trading plan look like? Having taught thousands of investors, I’ve seen a very wide spectrum. They’ve ranged from having no trading plan to a few simplistic routines and all the way to a 100-page manifesto that was totally impractical and untradeable to everything in between. General George Patton once said, “A good plan implemented today is better than a perfect plan implemented tomorrow.” I completely agree.
Before I get into the specifics of my own trading plan, it would be helpful for you to understand that my aim – indeed my constant mantra – over these past 25-plus years has always been to minimize risks and maximize rewards. In other words, my trading plan consists of a collection of probability enhancers that I’ve fished from the market seas over the decades.
Individually, these techniques, routines and procedures add small increments to the probability of achieving a profitable trade. But when I blend them collectively together, they produce a synergistic result equivalent to a probability hammer. The bottom line is that I am consistently able to minimize my downside, lose less on my losers and capture more of the upside, thereby achieving larger profits on my winners.
That is not intended to sound simplistic, but we humans are hardwired to an ancient set of gray cells that have us perpetually tethered to inappropriate financial decision making skills.
The key objectives of my trading plan are to drive mind-bending emotions from my investing, reduce stress when the market adrenaline kicks in, and facilitate the execution of my recipe in a uniform and undeviating manner. The market is your stage; your trading plan is your script. This is not improvisation. This is serious market theater. Without a trading plan, I don’t know of any other way to make money.
Obviously, this blog doesn’t provide me with a platform to enunciate each of the probability enhancers I utilize (although I will try to do so in my talk at ChartCon 2016). Having said that, most of my readership is familiar with the broad 10 essential stages of investing that comprise the chapters of our book, TENSILE TRADING. These are the foundations upon which all trading plans should be based.
These are universal foundations. From here, we personalize.
Perhaps giving you more details on one of the ten foundations will offer some clarity. Let’s use Stage 6 – Stalking – as an example. So much of investing is about knowing what to tune into and what to filter out. Your trading plan (and mine) for Stage 6 would specifically describe your system of filters. Stalking is all about limiting the universe to a manageable number of investable options. Therefore, your plan would detail where, what, how and when you look for the highest probability investments.
In Stage 6, another quiver in my stalking bow is my trading journal and the techniques I use to record my daily insights. This is a powerful tool that’s not to be underestimated. In addition, my trading plan describes in detail my “sisters strategy” whereby I never consider any stock without being introduced to the entire family. The stock market operates on the law of groupings. Therefore, individual stocks seldom levitate. They are guilty by association – an important concept you must understand. Understand the sector and industry it belongs to, as well as its sister stocks. The chart below would be an example when considering healthcare stocks.
Lastly, under Stage 6, my trading plan describes the framework I use for alerts and triggers, detailing how they are implemented and where they are deployed. These four elements are examples of my probability enhancers under Stage 6 – Stalking in my trading plan.
The mystery of it all is that having a detailed trading plan that you understand and trust will facilitate consistent executions that result in consistent profits. This is not stuff that pertains only to the unchained thoroughbred trader. This is basic user-manual stuff that all investors should embrace if they are going to play in the investing sandbox. It reminds me of a new car manual that I read recently. For liability reasons, I suppose it’s written for the lowest common denominator, but page 172 included the warning: “Do not drink contents of car battery.” There is a similar self-evident stock market truth: “Don’t invest without a trading plan.” This will become your “edge”.
I’ll be describing my own “edge” in much more detail at ChartCon 2016. Till then.
Trade well; trade with discipline!
- Gatis Roze, MBA, CMT
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