The term “happy” has its origins in the Nordic noun “happ,” which means “bonus” or “luck” in the sense that it is an event that occurred by chance, not by intent (happen, haphazard, hapless, etc). Contemporary English, especially American English, has blurred the original distinction between “happiness” and “pleasure”. The farther back in historical literature you explore, the more it becomes clear that “happy” was used to describe a state of perceived opportunity. One could be taking no pleasure from their current situation, but be happy from the prospect of future options.
Recently there seems to have been a large increase in the number of new people participating in trading, perhaps because increased media coverage is shedding light onto what’s generally thought to be a shadowy, restricted, and random “casino”. The more you trade, the more you get used to the concept of “opportunity cost,” and even significant losses do almost nothing to your overall happiness: “I must take a risk to realize a gain, and the losses are the cost of doing business this way”. Difficulty sleeping, overwhelming guilt, oily farts, sympathetic pregnancy, and crying spells are associated with hedonistic gambling, not a controlled extraction of market pricing inefficiencies. Decide what you prefer to do, discover what you are actually doing, and determine what you’re capable of carrying out.
If your game is the rush of gambling then just arbitrarily buy as many calls as you can in some thinly traded and heavily shorted biotech stock and hope you make a popular “unusual call volume” list to cause a squeeze. If you want smoother income, better sleep, more pride in accomplishment, a girlfriend, or to make the scoffers the scoffies, then you need a plan you can stick to.
“Theory” is terrible instruction. Specifically, a “plan you can stick to” means that you do not take a position unless you can describe the conditions that make that trade attractive with less than five mathematical variables—less than three is better. Don’t feel intimidated by the term “mathematical variables” if you’re not crazy about math. This is a just rule of thumb to help you get more winning trades by knowing exactly why you’re in a trade so that, theoretically, you know why to get out.
A “mathematical variable” for this purpose only means ‘specific’ and ‘universal’. A legitimate plan could be: “The bearish XYZ stock rallied 3.8% to penetrate its 50d SMA and ¼ retracement with 20% less volume than average. An Inverted Hammer forming on the daily chart will trigger a new short.”
In this example there are no qualitative terms like “heavy volume” or “pop” or “slowly/quickly” or anything that cannot be defined as a quantity. This is also a description you could conceivably generalize across a wide range of stocks with similar conditions.
If it would be impossible to describe to a piece of software why you’re taking the trade so that it can take other similar trades automatically, you’re chasing random noise.
I’ll expatiate on scanning for higher probability setups later, but a few basics are very quick improvements for anyone stuck in a rut. First, turn off the news and let the charts speak without you screaming “What are you idiots buying?!? That’s not good news!” over them every 30min. Hearing “rumors” only fuels the violent fantasies of finding “Anonymous Source” and telling Dick Cheney he might have WMDs.
Obviously it’s better to go with the Market as often as possible, so begin by looking at a monthly chart of the related index (for industrial stocks, DJIA trumps S&P even if it’s in both; for tech stocks, NASDAQ trumps S&P even if it’s in both; etc) with the relevant moving averages up (I use 12, 24, 48, 96, 204, 300 and go from there). Once you decide what the monthly trend is, switch to the weekly view with its relevant moving averages (similar 52wk multiples, usually). Determine where it’s likely to turn around and go with the overall direction of the monthly chart. Once you find areas where the weekly and monthly charts agree, fine-tune the entry on the daily chart—specifically by looking for supportive points that it has overshot and is likely to get drug out of violently.
Now do the same for candidate charts and set alerts, not for breakouts (those only work well when the general public is trading heavily), but for minor violations of support or resistance. You get great prices on calls when everyone is swinging from the chandeliers, fighting for puts like meth’ed out hyenas just because it’s half a percent under a support. An alert goes off, it’s time to pull up an intraday chart such as a 15min (5min is useful, but a bit extreme in genuine swing trading) and take a stab at an entry after it starts making higher lows. From there, pay more attention to the daily chart again to determine your exit. Intraday noise can shake you out when you would probably still take the same position based on how the daily looks. Forget about the P/L display—that’s only there as a sick practical joke.
By far, the most potent points are old support and resistance levels, especially at psychologically sexy round numbers (expect them to be overshot as market makers go stop-hunting to shake shares loose), trend lines, and virgin moving averages. The most potent of the potent is arguably the 200d SMA – 50d SMA crossover, maybe because so few people seem to talk about the Death Cross and Golden Cross. Anticipation of a cross causes some rally, and the price level of the averages becomes a very powerful support/resistance if the chart decides to test it in the near future.
In fact, this one is so important that I like to scan for the crossover preemptively to see which stocks are likely candidates over the next day or two. Most software can scan for stocks that crossed during the day, but you can modify that a bit by dividing by the stock’s volatility to get a list ordered by how far in the future the cross may be.
[(50d SMA price – 200d SMA price)/Historical Volatility] What you’re doing in this very simple equation is finding how many points apart the 50d and 200d are, and then dividing by how quickly the stock can move that distance.
Below are a few charts where I’ve added price lines extending forward from where the 50d and 200d crossed over. Notice how effective they are as support and resistance even in frenzy. Notice also that the FTSE just violated its “Death Cross” Friday, so there will likely be a lack of buyers forthcoming. Start looking through charts to find this reliable tendency so you can play it when it seems most insane to.
Don’t underestimate the importance of ways to maintain objectivity when you’re risking real cash. You’ll be much happier trading by the numbers, because a new high probability opportunity is always nearby.
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