Imprint These Images On Your Brain

sspencerGeneral Comments, Steven Spencer (Steve's) Blogs, Trader Development, Trading Lesson2 Comments

I tweeted the following this afternoon: there is “easy money” and “hard money” in trading. your longevity is determined by which one you choose to pursue…$$

I had quite a few responses. Some traders pointed out trading is not easy. And of course I agree with this. Trading successfully requires thousands of hours of practice and skill development. But once a trader has developed a certain baseline skill level they are able to more easily pull money out of the market by trading setups with superior risk/reward ratios and higher probabilities.

If a trader is making trades each day where their risk is 3 units to make 1 or entering trades that have a 10% chance of success they will not last very long. Of course you can send me the math that shows how it is possible to make money with the scenarios I’ve just mentioned but it misses the  point. People are emotional beings and the uncertainty inherent in trading causes each of us to experience varying levels of anxiety while trading. It has been my experience that the increased stress of being in low probability setups with inferior risk/reward eliminates traders from the game even if they have enough capital to continue.

So at SMB we stress (no pun intended 🙂 being in trades that follow the higher time frame trend. The risk/reward is often greater than 1:5 and the probability of success greater than 50%. Today, NAV illustrates these points beautifully. NAV gapped lower after reporting earnings and guiding lower. After a quick pop on the Open it was right back in the downtrend that had been established in the pre-market. SMB Traders were focused on trading it short. After its 10:00AM retracement traders used the horizontal consolidation just above 21 to re-establish shorts. The break of 21 failed to produce a new low but NAV continued to consolidate very close to 21 and when a 20.95 buyer dropped traders thought this would lead to a new low and another down leg. But NAV quickly reversed trading up to 21.25. Traders covered their shorts and began to focus on the long side.

If I had to describe the stages of this trade it would be something like this

  • weak stock has minimal bounce when market opens and resumes downtrend making new low
  • weak stock has a normal retracement after 10:00AM of about 35% offering another chance to establish a short position
  • weak stock drops a support level but fails to make a new low
  • weak stock drops a support level but only drops a few pennies and begins to hold higher
  • neutral stock becomes stronger as volume increase and it begins to hold higher
  • neutral stock has a surge in volume establishing an uptrend
  • strong stock moves higher consolidating at 22.40
  • strong stock moves higher consolidating at 22.75
  • strong stock breaks above a pre-market support level beginning an attempted gap fill

  • strong stock has a hard down move to 25 putting traders on alert that it may reverse
  • strong stock consolidates at 25 and breaks lower becoming neutral again

Our traders use the lower time frame chart and the tape to assist with position management and the higher time frame chart to make sure their bias in in line with the current trend. NAV was very In Play offering  a multitude of possible entries with very little risk. When it began its uptrend breaking above 21.50 there was no clear sell signal for over 3 points. This is the “easy” money. You just have to put in the hard work before you are able to experience it.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is [email protected].

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2 Comments on “Imprint These Images On Your Brain”

  1. your comments are not constructive and offer zero value to those who are willing to actually work hard and learn…  

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