Take the time to find the setups

Sometimes it feels as if I have run out of trading ideas. Especially when the market has thrown me from pillar to post for a few weeks and has taken some money from me. I then become prone to take trades that ‘look good’ without actually doing the leg work required to properly validate the trade opportunities.

In order to avoid this, I need to remind myself that I need to take the time to find the right setups. There are a few factors that need to be combined just right in order for a trade to be deemed a ‘high probability’ trade and therefore finding the right ones takes time, patience and effort. The last 4 or so weeks have been rather tough for me. Other than a big win on an Aspen short, the majority of my other trades I’ve either stopped out of or are currently running against me. This puts me in a precarious position and in danger of making irrational decisions. The sure fire way of me to avoid costly mistakes is to bury myself in the process of relooking at the entire universe of shares that I am trading in. This does not mean that I need to only relook my share universe after a bit of losing streak. It should be relooked every single month, at least. It does however take me, mostly, out of the market for a period. Allowing my mind to reset itself and also allowing me to find those trades that really count. 

So starting with looking at each industry, I need to look at the monthly and daily charts to see if there are any major trends that are changing. This is followed by looking into each industry to find the best and worst performing shares in each sector. This allows me to have a list of potential longs and shorts. 

Once I have a list of shares that I want to be long and a list of shares that I want to be short, I can start looking reading up on them. This is the boring part, but probably the most important. I need to read the last few years’ worth of SENS articles and get a firm grip on how the company makes money. I also need to compare some of the key ratios against those that I deem to be in line with what I require from a share to be able to go long or short it. Some shares will fall off the list and some will stay. 

What I am then left with is a list of shares that I am comfortable to long and short, depending on what the overall index is doing. This whole process is sort of ongoing, although I think that taking a day or two ‘off’ to spend the time digging through the market can only be helpful to my mind-set and bottom line at this point of the game.

Happy trading!

@TraderPetri
13 May 2015