Edge or Lack Thereof
A few thoughts.
I have a lot of opinions when it comes to Retail Trading - some reserved for conversations that are not public and some like this. Primarily, because I know that trying to talk to an addict (which in my view most Retail Traders are) is pointless - you can’t tell them anything they don’t know and at the end of the day it’s not my job.
But every once in a while, there are things where I want to speak on.
In 2021 there was a younger trader and a good kid who I was mentoring that was at our local cigar shop (some of you in DeltaOne know him), he was trading, or trying too and he took the path that 99% of Retail Traders take.
YouTube > Charlatan Educators > Momentum trading stocks as a day trader.
Add/reduce a few things but that is the general route most take.
He was doing what most try to do and what I am about to explain in this post and what I believe is a FAILED approach for so many new traders.
Momentum +Indicators + Back testing = Edge. Right?
Do you want to know what the edge of 95% of the Charlatan “Traders” are (Ricky Guitierrez, Ross Cameron etc.).
It’s momentum. That’s it. It’s finding stocks that are going to move on some news (can be dilution, press release - anything) the day or morning before then attempting to get in that momentum either once with size or over and over all day.
That’s THE EDGE.
But the fact is that there are thousands of listed companies that move every single day, and the idea is that you, as a ‘day trader’, have to find those stocks each day to trade and once you do you can begin to build a system.
Then, they typically look for repeatable patterns as to why the stock did what it did and that leads to back testing with indicators etc. to produce a “high win ratio trading setup” that they then usually guard with their life.
First, the dependency for one setup to generate sustainable, risk adjusted returns in your portfolio is not going to work.
That’s why some of you reading this will ask: “If you have an edge making money why would you give it away.”
It’s not the edge that is given away and that is the obsession with Retail Trading; this idea that there is one trade or one trade set-up that is going to repeat on perfect every single time.
That is NOT trading and that is NOT edge. And what most Retail Traders will do is begin back-testing or testing indicators to reproduce that 1 big trade they had that ONE time - because surely there has to be a repeating factor of why it worked. Right?
*Also to add to the giving the edge away thing - I literally told this kid what to do and how to do it and his first month not only did he break his trade capital allocation by almost +3,000% he didn’t even trade the 4 repeatable names I had him start out on.
So, to those of you are skeptical to this idea of “giving an edge away” - most of you won’t follow directions in the first place and second, many won’t dedicate the time to molding it to fit them anyway.
And let me be clear - developing long/short trade ideas ahead of time, once you really do this right is NOT HARD, once you actually try to learn it.
Ideas are, and should be, generated constantly which is why in The Weekly Report there are over 40+ names and situations tracked at all times.
Not all are always ready, some are static for momentum trading, but there is no back-testing of indicators or setups to develop an ‘edge’.
That all comes from a Top-Down Approach - so let’s get into it.
Most retail traders NEVER make it to this process above and when they do (like my friend) they don’t want to embrace it - and to those of you who knew him he was, like most new traders, hard-headed and set on his Charlatan YouTuber goals of momentum stock day trading.
If you’ve never seen this approach, it’s nothing new, almost any Professional trader at a long/short equities hedge fund or prop desk will use some iteration of that approach to generate long/short trade ideas.
And because this is a widely accepted approach in money management you can believe that others that are paying attention to that are allocating capital (money flows) to sectors that deserve it based on that.
This is one of the reasons energy-stocks have been back in TheLongVol Report as of recent, because of that process - and that is a SYSTEMATIC PROCESS for investment analysis.
That tweet above is what I mean. I don’t know that guy, but I’ve seen him cross my feed over the years - nothing poor to say about him either. But what I do know is that this is the same style of approach that most Retail Traders will attempt to emulate and if it works for you then it works for you.
But for most, it doesn’t.
It doesn’t because your perceived edge is a mirage because you don’t understand the why in the first place and when you don’t understand that then everything from:
Long/short trade idea generation
Portfolio structuring
Risk/position sizing
Results
Can never be developed out properly so that you have a systematic, repeatable approach.
Develop Long/Short Ideas with Top Down + Trade Structure = Repeatable Approach
There’s a reason oil/gas names made it back into the report last month and it comes from that top-down approach that you see there. And there’s a reason we use a static list of equities for momentum trading intraday - in fact, most Retail Traders could get away with just trading SPY 0.00%↑ and QQQ 0.00%↑ back and forth with 60-80 (at the money) calls/puts as A STRATEGY.
Will that work to drive a large portfolio? Probably not, which is why having a top-down approach allows you to develop a flowing list of long/short ideas.
And if you want to ring the cash register that’s just simply what is required!
Then from this point you can begin sizing positions accordingly and even get out of the day-trading/intraday time-frame window that plagues most Retail Traders.
You can put together a trade structure with plain-vanilla option strategy to capture a 10-60 day move if you want and not concern yourself with “being a fast trader” or having “fiber optic cable” to beat the algos and the rest of the self-inflicted roadblocks most encounter.
But none of that can be done without understanding a market behavior and how and why certain sectors are going to move in the first place.
What I do is separate the account/portfolio into multiple strategies.
I talked about that here in this post.
Some intraday trading, some long/short holds that are 10-60 days and some investing for longer term ( VSCO 0.00%↑ ) etc.
Could there JUST be a day-trading only approach? Yes, but that gets hard to do with a lot of capital at a certain point and it’s not a sustainable lifestyle to lead, at least for me - and I don’t want to spend my life staring at screens 8 hours a day!
However, you still need an approach to develop ideas even if you take the day-trading route and that approach, when you get to the point of wanting to size up, can allow you to then get into longer-term holds where you can trade larger WITHOUT the pressure of getting in or out perfectly.
Wrapping it up….
Developing ideas doesn’t have to be hard nor does developing trade structures but it is hard when you don’t understand what you’re doing or why.
If this helped, then great, you can start ringing the register! If not, it may down the road and for some (like my friend) it might take you a LONG time like it did that kid I was helping out.
That’s it. Develop ideas properly and understand why they should move; from there you can add all the indicators and magical tools you want.
Thanks for reading.
Dan
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