How to Develop Winning Trading Strategies (with real-world edge)

most trading strategies being taught out there don't really have an edge this means that even if you trade them with discipline you will lose money which means that knowing how to develop your winning trading strategies that not only fit your style but are actually profitable is possibly the most important skill you can learn and that's exactly what we'll be teaching you in this video [Music] in today's video I'll be discussing developing trading strategies 101. for more videos and content like this you can follow me on Twitter at the one lance B so one of my favorite quotes from maybe the most popular physicist of all time Richard Feynman he says the first principle is that you must not fool yourself and you are the easiest person to fool so what happened was a couple weeks ago I made a tweet that ended up being the most liked most favorited tweet that I've ever had and that really signaled to me that I was on to something that was really resonating with the community and that tweet was this my number one fintuit observation most failing Traders wrongly attribute their struggle to issues of psychology and risk management the reality is most have zero Edge they have naively been fooled by Ram Randomness into thinking that their wins or Edge this seduces them to troubleshoot the wrong problem the best analogy I can give to describe this is many struggling or putting the cart meaning risk management and psychology before the horse which is developing and having strategies with Edge then when it doesn't go they wrongfully think the issue is the cart and they go on to troubleshoot the wrong stuff and don't get me wrong both are important you absolutely do need risk management and psychology but all of it is useless if you don't have a true foundation of strategies with Edge no matter how good your risk management is and your psychology is you absolutely will not succeed at this job so many people kind of put up you know very good counter arguments to this but the ultimate counter argument that I made is I know many many successful Traders six seven eight figure traders that have awful risk management or awful psychology but they were excess as successful as they were for one good reason they have enormous enormous enormous Edge in their strategies and that can cover up a lot of that but if you have strategies with no Edge you know say you go to the casino every day whether it's Blackjack roulette whatever slot machines no matter how good your risk management and your psychology are no matter what you do you will lose money if you have no Edge and so how do I come to this conclusion many were asking me that and so this is based upon tweets Daily report cards that are sent to me and direct conversations with an assortment of traders in the retail training Community I've spoken with probably dozens and dozens of Traders uh it might be at Traders For A Cause in Vegas it might be at some of the happy hours I attend I've gotten a pretty good feel of what the community what their strengths are what their weaknesses are and I've met with people at all levels and for so many of the traders that are struggling out there I I understand this and I know what your problem is but so often they say oh what I need to work on is my psychology what I need to work on is my risk management but when I learn more and ask a bunch of follow-up questions it one thing becomes clear to me it's none of that the true issue is they're not trading strategies with Edge and Bella's noticed the same exact thing so I feel you I know how hard it is to build Edge and like in response to everybody on that tweet this is my video to you all so you can start to build Edge for yourself and I'm here to help if you want to learn three real world setups that our professional Traders use including the simple but highly effective setup that we teach all of our new Traders and the setup that turned one of our Traders into a seven figure big money earner check out the free online trading Workshop that we're currently running this is a hundred percent free intensive Workshop where you're going to learn more in a couple of hours than from years of online education so don't miss it so what is trading Edge and trading Edge means a Trader strategy that is positive expected value essentially EV greater than zero and so what's EV uh expected value is the probability you win times the amount gained if you do so then you subtract out the probability of losing times the amount lost when that happens many beginner trailers are fooled into thinking their win streaks are due to their strategy yet then their lost streaks are due to shortcomings of psychology or risk management in reality their trading strategies don't have meaningful Edge and the win streak was just part of inevitable variance a really great book on this topic is Fooled by Randomness by Nasim taleb it's kind of like the Bible when that Traders rely on is they talk Randomness and black swans and everything else very very popular and it really hits home on a lot of points that I'm discussing because so many Traders you're inevitably right if you were to flip a coin and it would be a 50 50 chance of heads or tails you're inevitably going to go on these win streaks and if you were flipping a coin and it landed heads heads heads heads heads at no point would you think oh that's just because I'm I'm doing everything right then if it was tails you wouldn't think oh man you know I just I just uh became overconfident right but what so so happens with beginner Traders is they get fooled into over interpreting their data especially uh you know what's so common is all here oh yeah I was winning for two or three months but now I've been on a two or three month loss streak well guess what you know odds are that that's just kind of uh the correction of that inevitable variance so how do we get you all some real Edge so first to be clear Edge is rare and most is noise I really discussed this in my broken slot machine video there's only going to be a select few tickers and Ops that are exceptional each day most of trading is a random walk especially if you're trading tickers that aren't in play you'll still be right fifty percent of the time or somewhere around there but even with individual days with high win rates that doesn't mean that in the aggregate you're a winning Trader right it all depends about in the long run and how strong that data is so how do you develop these strategies so first of all a few prereqs you almost always want to only apply these following methods to stocks and play these are going to be the stocks that tend to have fresh news catalysts exceptional technical patterns or stocks that are doing massive volume with big price ranges and you also want to be careful of hindsight bias you can't just simply Look Backwards and think everything is so obvious in retrospect you need clear predictable criteria that you're going to be able to apply in the future in real time so I made this little table for you all the way I think about it is there's four General methods of kind of developing and finding Edge now these are not mutually exclusive a lot of times they can overlap the first method is observation observation is where you're actively utilizing screen time each day to notice patterns correlations and predictable price action and as you can imagine there's pros and cons of each method so the pros for observation is it's easy to do during slow markets it requires minimal mental commitment and it's accessible to all Traders anybody can do this that's sitting at their desk the cons of this though is it can have a low hit rate oftentimes it can be time consuming but it might take a while to actually yield anything you can go down a lot of dead ends but like I said not too costly a strategy to find Edge so no harm done most of the time the second method is hypothesis hypothesis is a logical idea that you can then back test or forward tests to see whether it might hold true in the market the pros of this is it tends to have a solid hit rate on logical ideas and it's also accessible to everyone the only conser it really does kind of require creativity you really need a lot of brain power to always be thinking up new ideas that are reasonable and rational and don't worry I'm going to always get into a lot of examples of these two so the third method is reverse engineer and probably one of the most powerful methods and this is looking backwards at past moves to identify predictable variables and setups that you can use to develop a system my strategy the pros of this it has a high hit rate and high accessibility again pretty much anyone can utilize this using public screeners to analyze big movers and other tools at the average retail trade fingertips the cons though is you must be able to identify and properly systemize these so that you can capture them in real time you need to be really careful of false positives or uh you know really developing some hindsight bias which we can get into then finally the last of the four methods is mimicking and what that is is utilizing an external source for trading strategies with the presumption that they have Edge so the beauty of this is this is probably the most effective uh and has the highest hit rate and is the highest and fastest kind of path to learning and finding Edge but the biggest con is it's low accessibility it requires you to have a mentor access to others with Edge or some other source that gives you a profitable strategy so it really requires someone that's willing to share and your ability to kind of delve deep into that so now let's further break these down and give you more of an example of what I'm talking about so observation let me tell you a little story of of some Edge that I found that was through observation back in 2016 or so probably each month we would notice that the gun stocks would just pop out of nowhere one day a month you know Smith and Wesson Storm Ruger rgr these would make some massive massive trending moves we would then try to figure out why did this happen was it was it a technical breakout was there some type of news we scoured and scoured the internet and sure enough having observed these moves what we were able to find after uh studying these certain days is a monthly gun sales report was coming out I can't tell you why this report was so relevant to the market then or why this was so in play at the time but what we then I found out was that each month we were able to find where this report was being released figure out what the estimates are and Beak some of the first to be on top of these really massive moves and all that came from observation I didn't have any hypothesis about this I didn't have um you know any other you know preconceived notions all it was is I noticed gun stocks were making a massive move one day each month and then I did my best to try to figure out why and a more recent example is a trade I did this year mstr so mstr was a massive capitulation play versus Bitcoin and I've written this publicly on my Twitter but I'll go into it again now essentially mstr holds a ton of Bitcoin and so really because the whole company is essentially just a tracking and and holding of the assets of Bitcoin it really correlates quite well with the underlying price of Bitcoin and if you see this chart that I pulled up on Bloomberg for many many months mstr was tracking very very closely of course it's not going to be perfect there's a letter a lot of other variables but anybody can tell that that correlation is is quite strong so then going into uh the spring of this year as Bitcoin was panicking and so was the market mstr started to hugely hugely diverge from the price of Bitcoin if you were to look at those numbers that type of Divergence in percentage terms is crazy so now we're going to go deeper onto some of the charts so what you found was mstr versus the price of Bitcoin given it was just kind of holding the asset we probably had a 30 40 50 Divergence from what the underlying was doing and it was doing this in a very capitulatory Manner and so again I didn't have any hypothesis I didn't have this wasn't anything that I had been planning on doing the only way I found this trade and was able to make this long capitulation trade in it was simply by observation I had noticed how strongly mstr was selling off versus Bitcoin so because I was watching that I was then able to structure this trade and set that up for the full details please just check it out on my Twitter kind of goes beyond uh you know multi-page details that I can jump into in this video but that was an example of another trade I found this year solely due to observing the market and wondering why is the stock moving down so much more than Bitcoin so now hypothesis let me couple of examples what this is like example number one if the market and IPO Market in particular are very strong and hot do IPOs that hold above their pricing tend to Trend higher on day one right so I'm I've not observed anything all I have is a logical hypothesis right if the market is very very strong if the IPO Market itself is very very strong is it a safe assumption to think that these might Trend higher over time if already exhibiting positive bullish signals the second example is hot IPOs that are strong all day and finish strong do they have positive EV if you overnight them for a gap up and you might think these are pretty easy simple hypotheses but the reality is these have really good Edge these are both strategies that I have traded uh in the past during strong bullish markets another example is in the current bear Market to excess Gap UPS tend to get sold off essentially the inverse of buy the dip do people now sell the rip so what I'm doing is I'm using logic I'm thinking about something thing that makes logical sense right in a bull market IPOs tend to go up regardless so in an extra strong in an extra Hot Market is there an actual actual actionable trade and vice versa in a weak Market can I actually do the inverse of buy the dip these are very logical hypotheses it's very simple then to kind of collect your data monitor these and build a database of of such things so you can analyze it quite analytically and quantitatively and so then next we're going to analyze reverse engineering this involves finding the most exceptional moves in the market each day and then documenting them studying their charts and categorizing them to identify patterns and common variables so one way to go about doing this is you can create scanners based on stocks up or down the most and that day or maybe by various market cap level levels maybe you can study the ones up the most each week you can study stocks that are doing the most volume versus normal and what you can do is start to look for patterns in this you can use a program like Evernote to build a database of charts and categorize them by those patterns then try to isolate the various variables over time maybe the stocks that are up the most over the last month are all low float stocks or maybe the stocks that are up the most are all energy or maybe it's growth that has been screaming back and you're able to start to suss out those variables so let me give you a more concrete example one of the craziest moves of 2000 122 so far was an HKD so let's reverse engineer that so I'm going to take the chart on the left and that's just the daily chart and what we're going to do is we're going to look back and we're going to isolate where the move started so then we're going to try to document all the variables of the pattern and start to build this database so HKD was a low float IPO uh recently in in 2022 these had all been ripping way above their pricing and so in this specific daily chart when I zoom in what happened prior to that really parabolic insane move is we had a huge volume breakout a few days prior we couldn't pull back and then we break out again to highs and what's so interesting is what must have happened is it on low float stock like this after the big initial move you end up a lot of people short it tries to pull back then when we break out that second time so many people that are short can end up trapped and so what I would do is I would be taking these charts I would be tagging them in Evernote you know it could be low float IPO it could be daily breakout it could be you know intraday aligning with with with the daily Breakout and what I also notice is using a trailing stop of daily barlows would have allowed you to at least hold and capture this move so again it's just one data point I'm not going to um make it a strategy I'm not going to think I'm done yet but all I'm going to do is start to build up this database over time and you can start to do this for mean reversion plays you can start to do this for breakouts like this you can start to do this for IPOs you can start to do this for whatever was making the biggest the biggest Panic moves whatever was making the biggest up moves whatever was trading on the biggest volume you can figure out and reverse engineer why those happened what are the commonalities do they all need good volume do they all need to have high short interest do they all need to have low floats so that's kind of what reverse engineering tends to be about and then the final strategy is mimicking whereas Bella would like to say copy the Masters and while mimicking or copying the Masters might have a bad connotation there's absolutely nothing wrong with it there is no award you get for having the most original strategy the the reality is every successful Trader has stood upon the shoulders of the ones that have come before them there's nothing truly Innovative this day it all comes from learning from others and making it your own and so part of the power of working at a firm and having say a trainer like I did or having a mentor or a team to provide for you is like they give you that environment and they give you their strategies you're able to see what are they trading and why you're able to ask them detailed questions you're able to learn from firsthand from Traders with Edge so this is an extremely powerful powerful resource but keep in mind even if you're on your own you can utilize resources like the SMB YouTube channel or their training camp program you can find a mentor or you can begin to copy and document published strategies even on fintuit there's many amazing traders that have published their swing trading strategies or even their intraday strategies then even in books you have tons of systems like the O'Neill system that have been documented so don't feel bad about mimicking the beauty of this is you know that these strategies worked at some point or still do and you can study them and understand the logic and you have the power of like essentially expertise handing this down to you it's a very valid way to build the framework for your own where do you go from there so from there it's all about developing out the strategy like for starters you can be testing different types of exits what if I were to use a time stop and say hold for five minutes or 10 minutes or for one day what if my stop was price based for example maybe I was going to make a trailing stop using the prior bars the prior two minute bars or maybe the prior daily bar or it could be indicator based maybe I want to be long as long as we hold above v-wop or a moving average so all those types of things you'll want to test that once you get the foundation of a strategy it's so important to be identifying and refining all the variables which might make it better or worse let me tell you the story about a Trader that told me he crushes IPOs I looked through his data and he was hugely biased he didn't Crush IPOs if there were say 20 IPOs that year he crushed four of them and was Negan The 16 others so let's say he made a hundred grand in the four really crushable IPOs and lost you know say five grand in each of the 16 others his performance wasn't that impressive but he was missing a very key variable and that key variable ended up changing his trading and really transforming him into an awesome Trader and that variable was is he was crushing the hot IPOs you know the IPOs like when Alibaba came out and we were in a super strong bull market he would trade those really really well and make a lot of money but a huge chunk about money he would then lose and give back and all the IPOs that weren't hot he had it in his head that bias said oh I'm a good IPO Trader and that just wasn't quite refined enough the reality was he trades the hot IPOs really well and needed to avoid all the rest and that can really change your uh your performance then finally it's also important to set up alerts and scanners to help you proactively capture these setups you always want to continue documenting and refine refine refine building massive databases in Evernote of all the charts and all the write-ups of this will really help you succeed so look I understand this probably barely scratches the surface but the reality is videos on this topic are really time intensive to prepare I also don't want to overwhelm anyone and go too far too deep into the weeds just yet do you want me to dive deeper on this topic if so comment below or let me or SMB Capital now on Twitter at the one lance b or at SMB Capital if there's a demand for it I'll make this a multi-part series and really start to get into the weeds I'll give you more examples and really start to go through how you can categorize these trades how can you can suss out the different variables and how to continue developing Edge but this at least will hopefully get you started so let me know and I can't wait to hear from you all so you're an active Trader not doing as well as you want not doing as well as you deserve and you just can't figure out why you can't become profitable no matter how hard to try well let me show you why this is your competition the traders in this room this room right here is full of elite Traders some of them are making seven and even eight figures a year in fact our top guys have made nearly 20 million each in net trading profits in a single year let's head to my office so I can share more so you're probably used to seeing videos of lavish Trader Lifestyles trading gurus trading off of a laptop for an hour a day heck maybe even 15 minutes a day and then them relaxing on some secluded beach for the rest of the day well all I can tell you is that our Traders train like pro athletes they live and breathe the markets and are continually working on their trading skills because at our firm that's what we've found it really takes to make it in this game I'm Mike Bella Fury co-founder and managing partner of SMB Capital One of the world's top proprietary trading firms located in Midtown Manhattan and we're always looking for trading talent to hire and develop and not just to trade in-house on our desks but also to trade from their own home entirely using our firm's capital and we have numerous Traders doing just that allowing them to make upwards of seven figures trading the firm's Capital without risking their own money but to even get a shot at something like that you need to have the right training that's why we're doing a new free online presentation in which we share how you can get an interview with SMB to become an in-house a remote Trader trading firm Capital without risking yours and getting access to all of our firms coaching and resources and the best part you don't have to be a profitable Trader yet in fact we prefer to mold profitable Traders with our methods and our techniques that's why we have just three simple criteria that can earn anyone an interview we're looking for highly ambitious and determined traders who fit our culture first and foremost so if you believe that could be you sign up for the free one hour online presentation by clicking the link that's in your top right corner of your screen now

Channel: SMB Capital

Views: 80,794

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, trading 101, beginner trading strategies, trading strategy, lance smb, lance smb capital

Id: n5xGsMWEpT8

Length: 24min 0sec (1440 seconds)

Published: Thu Nov 24 2022