I think this is an important point that many new traders need to understand.....We sometimes easily say :
''You need 10-15 good/outlier trades to have a great year''
.....But how hard is it to actually capture them?
Below are some of my realizations over the past 5 years and what I truly mean when I say :
''You must surround yourself with assets where asymmetry or outlier potential can emerge more easily and naturally.''
For years into trading I had the following mindset: ''Filter your universe of stocks with some simple rules that and then focus on the stocks that look strong and the BEST setups.''
That worked nicely and still works nicely in certain windows per year where opportunities are all over the place and everything you touch turns into gold.
But these are small windows within each year.
So what do you do the rest of the months when only selective assets work and most of the universe isn't moving? Are you still executing on great setups? Because this leads to extreme frequency of trades and possible deterioration of your capital.
The other issue I had with that mindset was that without knowing anything about companies ( since I was looking only at price as a guiding factor) , I lacked that conviction element to hit the button big when it was needed. So naturally I was missing out on some moves just because I had nothing else to back up my conviction other than price. Trust issues.
Another problem I also figured out as I studied more was that amazing opportunities didn't emerge always from perfect ''setups''. They just went straight up from setups I would classify as 3*/5 or 2.5*/5......So I thought:
''is focusing on the best setups limiting my opportunity potential? Maybe...''
The other issue I also had was that out of 5K stocks available there are at least ~300 of them that look quite good based on prior price action moves, at any given point in time, and on certain occasions provide ''nice setups''....
So what, am I going to trade all of them when they show some linearity and a 5* setup?
<>
You have to remember that even if you track 800 different stocks over the span of a year as a result of your selection filters , where the list sits around 300-400 at any given snapshot of time......due to frequency and portfolio allocation constraints you can't execute trades in all of them.
So what happens in reality is the following:
If you execute let's say 60 trades per month (your average frequency) and you track a list of 300 stocks, you can essentially attempt on 20% of that universe in any given month.....Essentially you are covering the potential of 20% of that territory..... And how many stocks out of that 20% territory captured by your execution attempts actually have the chance to be outliers?
If you're executing only on great setups within that list of 300 tickers, then it's kind of random whether an outlier will emerge in that 20% coverage you have.
A lot of people might say ''man.... I had $SNDK, $AXTI, $LWLG, $MU etc. on my universe list , why didn't I trade them?''
For many people the reality is that the universe was too big relative to their frequency to potentially trade them, because other opportunities emerged first and didn't materialize.
<>
But here is where overfitting starts to spiral....
Because you can attempt to shrink down your universe (e.x from 400 to 50) by butchering your outlier potential, or you can shrink it WHILE carrying the essence of that outlier chance with you.....This is the whole game essentially.... I'll explain:
What butchering your outlier potential means:
For example, some people in their attempts to shrink down the universe put filters to only trade or surface stocks with let's say amazing fundamentals....That's not wrong, because ''usually'' for long term moves great fundamentals need to emerge....BUT IS it universal on all great moves???? The markets show that huge opportunities emerge even without any fundamentals (e.g. $OKLO, $LWLG, $AXTI recently etc.)
So if you put ''great fundamentals'' as a filter to go from 400 stocks down to 50, then you might be shrinking down the outlier potential as well.....
The filters used by traders are many, and each filter you add if you haven't deeply explored it's ripple effects has the potential to heavily exclude phenomena that the market has proven to reward......which essentially means...shrinking your outlier potential in the process. A hole in the water....
There's a reason only a few great traders exist and a lot of average ones.....Because the great traders , through studying, through experience, through observation of past historical opportunities are able shrink down their universe to align it with their frequency, WHILE simultaneously carrying over a large portion of the outlier potential the original ~400 stock list had.
And that's the HARD part. Because you TRULY succeed when you go from 400 stocks down to e.x 50 without losing many of the potential outliers in the process.
Think about it this way.... if 20 tickers out of those initial 400 were going to make a massive move, that's only 5% of the whole initial universe. Now if you shrink down to 50 and still have 10 of those sitting in your new list, your outlier chance just jumped to 20%. That's the whole game right there.......
......That's how you truly increase your outlier chance and position yourself in places where ASYMMETRY can emerge more easily.
And this is where I've focused my work in recent years. We know that great moves can happen because of themes alone, stories, catalysts, great fundamentals, or combinations of all of them. How can you mix all of those elegantly in order to shrink the universe without overfitting, while still carrying a higher outlier potential?
And this is where the phrase I use becomes evident: ''phenomena > setups.'' If, based on historical observations, you create good combinations of behavioral, fundamental, and technical factors, each with their respective weight, the bigger the chance you carry larger chunks of that outlier potential during the universe shrinking process....The more you carry the better your year will be.
<>
A lot of food for thought, but it's a good exercise for many to understand why trading is EASY and yet so damn HARD at the same time.....
''You need 10-15 good/outlier trades to have a great year''
.....But how hard is it to actually capture them?
Below are some of my realizations over the past 5 years and what I truly mean when I say :
''You must surround yourself with assets where asymmetry or outlier potential can emerge more easily and naturally.''
For years into trading I had the following mindset: ''Filter your universe of stocks with some simple rules that and then focus on the stocks that look strong and the BEST setups.''
That worked nicely and still works nicely in certain windows per year where opportunities are all over the place and everything you touch turns into gold.
But these are small windows within each year.
So what do you do the rest of the months when only selective assets work and most of the universe isn't moving? Are you still executing on great setups? Because this leads to extreme frequency of trades and possible deterioration of your capital.
The other issue I had with that mindset was that without knowing anything about companies ( since I was looking only at price as a guiding factor) , I lacked that conviction element to hit the button big when it was needed. So naturally I was missing out on some moves just because I had nothing else to back up my conviction other than price. Trust issues.
Another problem I also figured out as I studied more was that amazing opportunities didn't emerge always from perfect ''setups''. They just went straight up from setups I would classify as 3*/5 or 2.5*/5......So I thought:
''is focusing on the best setups limiting my opportunity potential? Maybe...''
The other issue I also had was that out of 5K stocks available there are at least ~300 of them that look quite good based on prior price action moves, at any given point in time, and on certain occasions provide ''nice setups''....
So what, am I going to trade all of them when they show some linearity and a 5* setup?
<
You have to remember that even if you track 800 different stocks over the span of a year as a result of your selection filters , where the list sits around 300-400 at any given snapshot of time......due to frequency and portfolio allocation constraints you can't execute trades in all of them.
So what happens in reality is the following:
If you execute let's say 60 trades per month (your average frequency) and you track a list of 300 stocks, you can essentially attempt on 20% of that universe in any given month.....Essentially you are covering the potential of 20% of that territory..... And how many stocks out of that 20% territory captured by your execution attempts actually have the chance to be outliers?
If you're executing only on great setups within that list of 300 tickers, then it's kind of random whether an outlier will emerge in that 20% coverage you have.
A lot of people might say ''man.... I had $SNDK, $AXTI, $LWLG, $MU etc. on my universe list , why didn't I trade them?''
For many people the reality is that the universe was too big relative to their frequency to potentially trade them, because other opportunities emerged first and didn't materialize.
<
But here is where overfitting starts to spiral....
Because you can attempt to shrink down your universe (e.x from 400 to 50) by butchering your outlier potential, or you can shrink it WHILE carrying the essence of that outlier chance with you.....This is the whole game essentially.... I'll explain:
What butchering your outlier potential means:
For example, some people in their attempts to shrink down the universe put filters to only trade or surface stocks with let's say amazing fundamentals....That's not wrong, because ''usually'' for long term moves great fundamentals need to emerge....BUT IS it universal on all great moves???? The markets show that huge opportunities emerge even without any fundamentals (e.g. $OKLO, $LWLG, $AXTI recently etc.)
So if you put ''great fundamentals'' as a filter to go from 400 stocks down to 50, then you might be shrinking down the outlier potential as well.....
The filters used by traders are many, and each filter you add if you haven't deeply explored it's ripple effects has the potential to heavily exclude phenomena that the market has proven to reward......which essentially means...shrinking your outlier potential in the process. A hole in the water....
There's a reason only a few great traders exist and a lot of average ones.....Because the great traders , through studying, through experience, through observation of past historical opportunities are able shrink down their universe to align it with their frequency, WHILE simultaneously carrying over a large portion of the outlier potential the original ~400 stock list had.
And that's the HARD part. Because you TRULY succeed when you go from 400 stocks down to e.x 50 without losing many of the potential outliers in the process.
Think about it this way.... if 20 tickers out of those initial 400 were going to make a massive move, that's only 5% of the whole initial universe. Now if you shrink down to 50 and still have 10 of those sitting in your new list, your outlier chance just jumped to 20%. That's the whole game right there.......
......That's how you truly increase your outlier chance and position yourself in places where ASYMMETRY can emerge more easily.
And this is where I've focused my work in recent years. We know that great moves can happen because of themes alone, stories, catalysts, great fundamentals, or combinations of all of them. How can you mix all of those elegantly in order to shrink the universe without overfitting, while still carrying a higher outlier potential?
And this is where the phrase I use becomes evident: ''phenomena > setups.'' If, based on historical observations, you create good combinations of behavioral, fundamental, and technical factors, each with their respective weight, the bigger the chance you carry larger chunks of that outlier potential during the universe shrinking process....The more you carry the better your year will be.
<
A lot of food for thought, but it's a good exercise for many to understand why trading is EASY and yet so damn HARD at the same time.....
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