Most of your edge in trading stocks-in-play is coming from discretion and it’s pretty small. Of course, many bright minds will use their backtests to gain a bit more edge – and this is really helpful to know that, for instance, if you play your VWAP continuation trades, you statistically have a 60% win rate on some of those technical-specific structures. And even if the backtest itself could not make money due to commissions and slippage – you know that overall, just technically – this is a 60% win rate. So when you see this particular technical trade set up – you have more confidence in trading it. But to actually profit from this – you will have to place this technical trade into the context of a Setup, and you will place that Setup in the context of the Bigger Picture market, and then you will read the Tape to see character of tape changes to get better prices on your entries. There are many large hedge fund managers who need to operate with big position sizes and have to run buy/sell programs – so the market becomes an opportunity-generating machine for you. From the thousand opportunities that the market generates every day, you sift them through the sieve of contexts, you have to only pick trades that make sense to you – so your edge is small. You will make hard work every day to understand these contexts to make your executions – that’s what machines struggle to do. Let this thought keep you away from 1) overtrading; 2) not doing morning prep; 3) not journaling and reviewing your trading. Remember, if a machine can make your trade – there’s a high chance that you’ll be out of the game. First algos were created just to make routine work a human did before. First algos were primitive – like buy new intraday high or sell new intraday low to catch trend (and then when it became very popular – first predatory algos came along – sell new intraday high and buy new intraday low, to make money stopping out the crowd).
Gaining your edge is not an easy task – markets are highly random because markets are always improoving to be more efficient. Follow the logic – an efficient market is a market where you can’t make money – because it’s already efficient – and if you can’t make money – that means only one thing – the price action is random, because only in random price action you truly can’t make money. We know that markets are not 100% efficient, but they always develop to be more and more efficient. Nowadays, price manipulation is so advanced that most of the time, what you see is random price action to you. Take a look at this great video from @braintruffle, non-linear dynamics researcher, PhD:
https://www.youtube.com/watch?v=-jF9gW2r_bk
What you saw in this video is just the tip of the iceberg. That’s why you do your prep – you want to find stocks with real and substantial order flow and outline potential levels where you can spot imbalances in supply and demand within that order flow. Top-tier firms like Renaissance Technologies, Citadel Investment Group, Goldman Sachs, etc., hire top mathematics, statistics and physics PhDs to research the markets for a systematic edge, so it’s pretty hard to find one that can be exploited without any discretion. And if you do find one – it either requires a huge investment into infrastructure, or it won’t last long. Don’t think this is easy – quants have thier own problems, as James Simons from Renaissance Technologies said – it’s not very hard to make an algo, but it’s hard to understand when to turn it off.
Now that you have a pretty good understanding of how efficient the market is, so when you run into a trading guru, a streamer who shows his trades live, or someone who always has a referral link to a “best prop firm ever” in the description, don’t judge him by screenshots, confidence, or the size of his claims. Judge him by how specific he is. Can he tell you exactly what stock he is looking for before the trade starts? Can he describe the setup, the market context, the level, the entry trigger, the invalidation point, the exit logic, and the conditions where he should not be trading it? Can he show you the difference between a clean play and a low quality imitation? If the explanation stays at the level of “I trade momentum”, “I read liquidity”, “I follow smart money”, or “I just feel the tape”, then there is probably no real playbook behind it. Maybe he can trade, maybe he cannot, but there is nothing you can reliably learn from that.
Compare this with the two playbooks from the previous articles and ask yourself how specific each trade was there. The more specific the playbook is, the easier it is to understand whether there is a real trading process behind it or just a vague story built around hindsight. Or take Qullamaggie as an example. Whether you like his style or not, he is very specific. For the breakout setup, he talks about a stock that has already made a large move, then pulls back in an orderly way, forms a consolidation with higher lows and a tightening range, and then breaks out of that range. He also talks about the stock surfing the rising 10-day and 20-day moving averages, and about the general market environment – whether the S&P is above its rising 10-day and 20-day moving averages while those moving averages are pointing up. He also talks about keeping the stop within the ATR so the risk/reward does not get destroyed, and about not taking trades if the stock has already moved more than one ATR, and so on and so forth. This kind of specificity is not a guarantee that the person is real, and it is not a guarantee that you will make money copying him. But it gives you something to test, journal, compare, and reject. Scammers sell vibes. Traders describe conditions.
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