Trading Education: Part 2
An adaptive approach to developing a thesis on the short-term market trend
Look, it takes most people at least 3-4 years to become a profitable trader. But between Day 1 and the day you become a successful trader - however you choose to define that - don't expect results by running on the proverbial treadmill. You can't just log the time, do the hours and wake up on that fateful day in the future with all the skills (and money) you always dreamed of having.
You need to think critically, develop a method to your trading. You need rules, methods, processes, guidelines, both plans for failure and plans for success. For me, my trading week starts every Sunday morning, instead of going to Church I pull up about 50 charts instead. I look at the macro landscape, sentiment, positioning, systematic flows, seasonal flows, volatility, credit markets, bonds, forex, price action, technical analysis to name a few. I look at each chart and evaluate it on its own merit, and also within its own history and determine if any secular trends are developing. I then look to fit all these pieces together and construct a narrative. The story for the market is which prices it wants to explore, where it wants to trade next.
Trading is so complex, there are so many levels to it. It's one of the reasons why we love it. But let me tell you from experience, it's so much more fun and satisfying to be learning as a trader while you are making money. The Pareto principle when it applies to markets is pretty basic and straightforward. If you are able to determine the short term trend of the market, you can make money even if your trading skills aren’t quite developed yet. You can still make money despite picking bad entries/bad exits, choosing poor tickers, or even getting bad fills provided you are trading alongside the market trend. That is to say, if the market is going to rip 100 points in a week, does it matter if you bought $SPY calls, longed $TSLA shares, or long micro $NQ futures? Does it matter if you crossed the spread and overpaid 10% for an option of that option went up 200%? Does it matter if you bought the April 21 $420 call or the May 19 $405 call if the S&P ripped 100 pts? No, no, and no.
You need to look at trading through a pyramid/hierarchy type of perspective. Recall Maslow’s hierarchy of needs, but try fitting and interpreting that into a trading design. First off, most important is determine what is likely to be the short term trend of the market on a week-to-week basis. Once you are reliably able to do that then you can worry about which stock to buy, es or nq futures, what delta spy call or which strikes and expirations to buy. That's all small stuff relative to getting the general direction right.
Image A: Prioritize the right things in your journey as a trader. Focus on the most important things and master them before worrying about the smaller details.
My own analysis of the short term market trend I conducted last Sunday I made available free below, and I hope it helps someone.
If you came into this week looking to short, or bag holding puts you need to re-evaluate some things. Don't beat yourself up over losing money - that's part of the game. But you do need to be hard on yourself when there is possibly something wrong in your process of identifying directional bias in the market. Or do you even have a process? The data, price action, MGI that I was looking at last week to me painted a very lopsided picture. One that was overwhelmingly bullish. We are all watching the same market, we all have access to the same information. So if you looked at all these factors affecting the market and came to the conclusion you wanted to play on the short side, what exactly did you see? What information did you have, or were looking at that made you think the risk/reward was favourable for shorts? You don’t need to answer me, but try to answer that yourself.
Ultimately, I determined my week to be successful not because I was right, or because I made money but because of how comprehensive, accurate, and relevant my weekly analysis was. It allowed me to come to my conclusion of having a bullish bias, with a calming conviction. Knowing that even if I was wrong, and the market traded down, that on a long enough time frame (that you should be participating in provided you are managing your risk appropriately) you will be right more than you are wrong. Your winners will be bigger than your losers and you will win more often than you lose. You will accumulate and compound significant wealth if you acquire those trading skills.
After you develop that ability to reasonably accurately predict short term market direction and trend, you can then work on the finer details. Such as picking the right stock in a trending sector. Which strike/date/expiration on options. What price to place your short call at in a call spread. What is the optimal delta for your chosen options trade and so on and so forth.
But first things first. Think of your process of developing a directional market thesis as an adaptive methodology. Start with a process (an iteration), test it, reflect critically and adjust it based on feedback that the market is giving you. Do it over and over again each week. With time, risk management (you must stay in the game), experience, and constant feedback this is an actionable way to take steps towards fulfilling your goals as a trader.