Process, Discipline, and Continuous Learning

In order to understand who I am as a trader, I have to define who I am as a person. I am in my forties, married, I have two teenage children, I work full time, train Jiu-Jitsu, and trade stocks. In order to manage all the pieces in my life, I have evolved to a trading time frame of weeks to months. I do most of my chart work and decision making in the evening and on the weekend when the market is closed. I am completely self-taught when it comes to trading stocks.

There are three books that have helped to define me as a trader.

  1. How to Make Money in Stocks by William O’Neil
  2. Secrets for Profiting in Bull and Bear Markets by Stan Weinstein
  3. Market Wizards by Jack Schwager

Each of these books added value to my style and I highly recommend all three. 

The other place of influence has been Twitter or commonly known as FinTwit (Financial Twitter). There are some really amazing traders and there is a lot of noise. When I first started I followed a few hundred people, but as I defined myself and time frame I now follow under 50. I had to unfollow really great people/traders, but because their time frame was much shorter, or they traded futures or options which I do not trade, I had to unfollow because their posts became noise to me. 

I tend to trade on the long side most of the time as long as we are in an upward trending market. The first part of my process is defining what type of market we are in. I’m a K.I.S.S. (Keep it simple stupid)  sort of guy so I chart three moving averages to do this: 23dema, 65dema, 200sma (dema=daily exponential moving average, sma= simple moving average). If the averages are going from the bottom right to the top left and are aligned 23above 65 and 65 above 200 in the QQQ (Nasdaq) then the market is in an uptrend.

Trading Process


This is the start of my process. When I look at charts I try to keep them clean and simple. I look at price, volume, 9dema, and 23dema. That is it.

Trading Process and Discipline


This is how my charts typically look. 

Once I have a confirmed uptrend in the broad market creating an environment where going long makes the most sense, I start my Top Down Approach.

Relative strength is the cornerstone of my process. I create a ratio chart with each sector relative to SPX (S&P 500). For example here is Technology (XLK) vs SPX:

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This chart shows that technology is clearly outperforming the broader market. The chart below is the exact opposite, energy XLE relative to SPX is clearly a relative laggard:

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Once I have my list of which sectors are outperforming, I then look for subsectors within that sector that are setting up or even better outperforming the sector.

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As you can see the ARK Innovation ETF is outperforming the technology sector as a whole. Now I go to the website and take a look at ALL their holdings. Here is their top ten:

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All these names are possibilities, but I am going to drill down one more time to see which names are outperforming the ARKK ETF. As you can see TSLA is outperforming.

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I make two lists at this point: (1) the outperformance relative to the ETF and (2) everything else in the fund. 

Now I start a simple fundamental analysis which looks at earnings per share (eps) year over year which should be accelerating and sales which should be over 20% or greater and accelerating on a year over year basis. 

I then chart the names that fit the criteria up to this point. I am now looking for signs of accumulation on the volume profile as well as the chart being in an uptrend.

If a stock has made it to this point it is a very strong stock, but I am not done yet. I then look for institutional ownership. I like names with at least fifty percent ownership to help support the price, this is not a deal breaker, however it is the icing on the cake.

The penultimate action is to look at which stock is in a pattern I like to trade. There are four different patterns I like to trade: Cup and Handle, High Tight Flags, Breakout and Successful Retest of a Base, and Double Bottoms. 

I then grade the survivors of this process based on relative strength, technical, fundamental, ownership, and chart setup from A+ to C and rank them. I try to only buy my A+ and A setups.

Here is an example: At the time of writing this, Invitae (NVTA) satisfies all the criteria, has shown signs of accumulation and has set up a pattern (breakout and successful retest of a base) that I have found success with.

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I try to buy as close to the 23dema as possible, usually within five percent of it; this helps me with my risk management.

Risk Management is at the core of how I manage my trade. Once I buy (the number of shares is always in multiples of three) into an equity I automatically set two of my three sell points.  My goal in trading is to minimize my time in the red area (big loss), try to maximize the dark green (big gain) while knowing many trades will fall into the light green and yellow areas.

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The first sell, which is one-third of my position, is at 5% above my entry. This is actually my favorite sell as it almost guarantees me a break even or small loss on the trade.

The second sell is one-third of my original position at 20%. 20% is the point that William O’Neil research says most stocks begin to create another base. 

The remaining one-third position I let ride as long as it will until price closes below the 23dema on two consecutive days. This may be changing in the near future, some recent research I have done may lead me to use two closes below the 65dema for the let it ride shares.

I know I am wrong in the trade if price goes below the 23dema for two consecutive days at any time. If price is very close to the pivot or base breakout I may use that as my alternate stop.

The risk management that I employ is one that fits my personality. First, it gives me a quick win if I hit the 5% sell (it also gives me a dopamine fix). This money can now be recycled and put back to work on another position that may be setting up and I want to be a part of. I don’t have to sell whole positions on an emotional whim because of fear of missing out (FOMO) of something else that is starting to move without me. It also discourages the chance of a big loss.

The 20% sell does the same thing (bigger dopamine fix) and it takes some more money off the table if the stock goes through a new basing period or reverses. This almost guarantees me a winning trade.

I want to be involved with a stock that can double, triple, or more, and this risk management system also satisfies that. The last third is now a small enough size where I can give it room to run if it is a true market leader (TML) and let it go for as long as it can. As Edwin Lefevre famously quoted Jesse Livermore in Reminiscences of a Stock Operator: “It was never my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!”

The final, and most important part of the process, is discipline. Once the process was put into place I realized, sometimes painfully, not to stray too far from it. Discipline of the process will take care of the outcomes if I follow what I created. The structure took into account my personal psychology of hating big losses, FOMO, and wanting big winners. If it were easy everyone would win in the market.  No one ever reaches the point where they know everything in trading, refining the process to increasingly put the odds in your favor is the key to consistent returns.

Abraham Lincoln said:

Give me six hours to chop down a tree and I will spend the first four sharpening the axe.

Disclosures at the time of writing: long NVTA

Written by @alphacharts365

JT Fintwit