The Aha! moment of my career came when I started looking at price action as a study of market psychology. My thought process is built upon 4 fundamental rules which helps me understand what the market wants to tell. And due to this, I never find myself confused with any (1/n)
of the trading decisions I've to make. Let's see those 4 rules-
1) Thinking in terms of suddenness, extremes and urgency - this is important for chart reading.
2) Thinking in terms of expectations and expectation failures - helps with understand what major forces are (2/n)
doing, how they are reacting to what is looking obvious.
3) Thinking in terms of Decisiveness & Indecisiveness - helps a lot with my decision making process.
4) Thinking in terms of Risk vs Reward - Helps in refine my decision making process, this is more of an (3/n)
extension of the 3rd rule.
The conventional way of thinking which we are tought through the books written decades ago, which focuses more on pattern matching, will lead you to the average results only at the best- "average results" is a very generous word in fact, but the (4/n)
truth is even average results are very difficult, because of institutional manipulation which uses retail order clusters to built up or offload their positions. We need to think differently, sometimes contrary to the prevailing sentiments, and read market actions between (5/n)
the lines without being emotionally attached to any of them, to be able to make money. (6/6)
• • •
Missing some Tweet in this thread? You can try to
force a refresh
The collision of two contra beliefs in technical analysis - an interesting discussion between me and a student.
A while ago I was explaining the exit strategies to one of my students, where I explained him to pay attention to the MA which are tested back-to-back since last few weeks (if there is one) to use them as TSL instead of the default TSL as per strategy as it is as per the behavior of the stock.
He asked me a question - "Sir, during our CRMC module you taught that as a level is tested back-to-back, it becomes weaker, not stronger. This is going contrary to that belief."
This thread contains the answer which I gave him, and an interesting tale of making sense between the two exact contrary beliefs in TA. (1/n)
When we read John J. Murphy or any other conventional TA book, it always says that the more time a support or a resistance level is tested, the stronger it becomes.
But when you learn the concepts of @realsamseiden, renowned trader who is known as the father of supply and demand trading - he presents a counter view. He says that the more time an order block is tested - it becomes weak.
For momentum traders, this is the exact concept which creates VCPs.
Most of us often like to choose one side based on our bias - either this is true or that is. But very few of us spend time thinking what exactly creates these contrary beliefs. I strongly believe in one thing - critical thinking needs not accept anything on face value, nor reject anything without looking for all the possible dimensions. Many times, the exact concept is not useful or is flawed, but there will be concepts which can be taken and applied elsewhere in our learning or refining process.
I often tell my students, I don't want to give you an assembled car, rather think of the concepts as various parts of the car - once you understand them, you can mix and merge them as per your need and situation to carve a superior process flow. This is exactly where your imagination and creativity come into play and help you find unique solutions for your trading problems. (3/n)
In my situational awareness webinar, I explained 3 key drivers for high returns -
1) Compounding (Long term 10 Years) 2) Earnings driven (6 months to 1.5 years) 3) Momentum driven (1 day to 1 month)
There can be several different types of people who use compounding to make money - the first type is ignorant investors who don't know much about the stock market but want to become part of wealth creation through stocks. They invest in mutual funds or bluechip companies prioritizing sustainability over scalability.
The second category of people who make huge money is those who bet on scalability along compounding. Take example of Rakesh Jhunjhunwala - he made huge money out of Titan as not only the stock compound but also grew significantly. (1/n)
In the stock market, every year's biggest winners, aka monster stocks or model stocks, list is always dominated with earnings driven movers. In almost all stocks, earnings are cyclical - stocks post 4 to 6 quarters of huge earnings growth followed by a downcycle. Take an example of Laurus, which once had a TTM EPS of ₹18.30 with P/E ratio of 35-40 at the peak price of ₹720. Today, at ₹400 the stock is at 100 P/E with only ₹3.49 TTM EPS. One more bad quarter will drop EPS by ₹1 or ₹1.5 (if earnings come similar to Dec quarter) and P/E will shoot up to 200 at current prices.
Laurus will definitely go through another earnings cycle sooner or later but what is important is, if we aren't an investor, it doesn't make sense to sit into a stock for a 60% drawdown. Rather, a new entry again when it gives an EP will make our gains much bigger.
Short term momentum is totally driven by technicals and are apt for swing and short-term trading. There are different tendencies which help us make quick money through these phenomena. (2/n)
But what is most important and what is the basic purpose of this thread is the hybrids we create by merging two growth drivers -
1) Earnings + Compounding 2) Earnings + Momentum
Earnings plus momentum is extremely popular these days, thanks to Pradeep Bonde and Qullamaggie's strategies. But what I really want to talk here is about the hybrid created through merging Earnings & Compounding, because most traders only utilizes the power of compounding on portfolio level where your realized profit becomes part of your capital for the next trade. But they lack understanding about the power of compounding on stock basis, which brings huge difference in the outcomes.
Let me explain it through an example of Dixon in 2020-21. Here I will use 2 different strategies of trailing, one with 21 DEMA and second with 50 DEMA. (3/n)
A must read thread on how some of the great traders work.
But while this is one great way to manage positions, I will present some others ways which can go exactly contrary to the explained rules and styles in order to explain how decision making should be done in many ways to generate similar outcomes and should be done according to your objective rather than how one or few traders trade.
The ultimate objective is to explain a trading decision making framework.
Thread - (1/n)
Lets understand how and why we make trading decisions (we all use it, but we do it in subconscious mind and don't realise it).
This framework has 3 parts -
1) Expected Outcome or Reward from the decision - Why are we making the decision?
There are 4 reasons behind any trading decision -
a) Earn Money (example - entering a trade or holding it)
b) Save Capital (example - taking a loss at or before SL)
c) Save Profit (example - using TSL or selling into strength)
d) Save Time (example - not sitting through pullback, taking precise entry or tight SL, selling into strength or time stops)
There can be more reasons as well, but these mostly cover all popular reasons. (2/n)
2) Consequence or Cost or Risk involved in the decision - what if outcome doesn't go as per expected?
Here are the 4 common risks involved with trading decisions -
a) Loss of More Capital (example - waiting for initial SL to trigger, giving more room, high size without reducing SL etc)
b) Loss of More Profit (example - deeper TSL, selling into weakness, holding more size to sell into weakness or upon more decisive trigger)
c) Loss of More Time (example - deeper TSL, waiting in base, holding if stock doesn't moves up immediately etc)
d) Loss of Opportunity (example - tighter SLs / TSLs, selling into strength, selling if stock doesn't immediately moves up, taking small position size etc)
In all our decisions we always prioritize one thing at the cost of other. All trading decisions always have a cost. (3/n)
Last Friday, I wrote about Understanding Risk and Resources. Today, I am writing the second part of it - Understanding Risk, Resources and how to achieve Optimum Performance in Trading.
As you have gone through the work of people who achieved optimum performance in trading consistently like @DanZanger @Qullamaggie etc., you will realize one common thing - their techniques and tactics are nothing special or much different than ours.
Unfortunately, we think it is their techniques which are the reason for success.
While this can run many workshops, webinars, courses - it is not going to help you take the next leap in trading.
Yet we spend countless hours going through the same crap we already know, again and again, and jump upon anything new, any new jargon we find - hoping it to help us achieve optimum performance.
Brad Koteshwar - The Perfect Speculator
Brad Koteshwar - The Perfect Stock
Chris Kacher & Gil Morales- Trade like an O'Neil Disciple
Chris Kacher & Gil Morales- In the Trading Cockpit with O'Neil Disciple
Chris Kacher & Gil Morales - Short Selling with the O'Neil Disciples (2/n)
Curtis Faith - Trading from Your Gut
Curtis Faith - Way of the Turtle
Frank Cappiellos - New Guide to Finding the Next Superstock
Gerald Loeb - The Battle of Investment Survival (3/n)