How We Trade – Less Excitement, More Profits

Like many of you, I started my trading career as full-blown technical trader. There were many sleepless nights spent studying charts, reading method books, watching videos and webinars, trying out any indicator or strategy I could get my hands on. I filled at least 3 spiral bound notebooks with trade logs and notes from my experiences. Every time something went wrong, I’d come up with a rule to prevent it from happening again.

As you could imagine the list of rules grew quite extensive. So much in fact that it became hard to keep track. I began to think and feel like everything I did was going to eventually become some rule of “what not to do.” In some way it felt good to have rules to trade by, but in the meantime my account grew smaller with every new approach I tried.

My life too became complicated, as I was attempting to hold down a teaching job while trading all day long (my family and students were not too happy). I always thought that if I could just devote all my time into trading and make some money in the market, I could buy more time later to spend doing what I really wanted to do.

This lack of balance was exactly what was preventing me from succeeding. I realized I needed to take my life back and start putting others needs before my own. Simplifying things with a less is more approach, not only helped me in my relationships, but also set the path toward greater profitability. Become a better person first and better trading will follow.

It was the need to simplify and take my life back that led to the design of TVO, HG and more recently IO. All three systems do have rules, but most are built right in the algorithm, so there’s no need to keep track of them. There are some guidelines to trading them that need to be followed to properly execute the trades. Call them rules if you will, but I prefer to think of them more as a philosophy.

Warning: Follow these steps and you may find yourself with much higher profits and a lot more free time to enjoy things in life!

We don’t care about price. While that sounds hard to believe, there’s one simple concept underneath our approach… Volume precedes price. If you can get an accurate read on what’s happening in volume, then price will follow. We monitor fluctuations in up/down market volume and then base our position on the premise that the condition will revert to the mean. In other words, market volume rises and falls just like price, but in a much more predictable way. Focusing on volume also helps to tune out the noise.

We don’t watch the market all day. Our entries and exits are either Market on open (MOO) or Market on close (MOC). All of our signals are generated the previous day, so the trade decision is already made before the open. Yes it is possible to chase the price around and end up with what you think may be a better entry or exit, but statistically the odds are against that making much of a difference in the long run. Chances are if you’re reading this so far, the life of a day trader is one you’re ready to leave behind.

We don’t use stops. The nature of a mean reversion entry is typically very volatile to say the least. Whipsaw moves often take out all stops at seemingly unbreakable levels of support and resistance. As a result, many technical traders set tight stops and frequently go in and out of their position many times before the desired move transpires. While this method can be quite effective, it requires vigilant monitoring of the market on an intraday basis. We simply don’t have the luxury of time to chase things around all day (and neither should you!), so we just sit tight and allow the trade to play out. And for that reason…

We limit risk. Without stops, limiting risk or position size becomes even more crucial. With options trades, no more than 10% of capital is used, so even in the rare event of a 100% loss on the trade, your total account will remain intact to trade another day.

And lastly, don’t watch your account balance all day either! This is sort of the same as #2 but has for more destructive implications. The day-to-day gyrations of the market are insignificant in the time frames we use, even the smaller ones. Our entries and exits are determined by a time-tested formula, which we’ve found works far better than emotional judgement (Many “market wizards” have concurred on this), so while the position is open there’s no use in stressing out about it.

So what do you do with the extra free time you have from trading less? Well, my wife and I are currently working on hiking all 48 of New Hampshire’s 4000 foot peaks (known as the 4000 footer club)… We’ve got 15 down so far. Hope to see you out on the trails! -MD

To test drive the TVO System for yourself subscribe today. The first month is free.

To view past positions check out our Trade History.

To learn more about market volume, The TVO System, The Heat Gauge (HG), or how to trade options, follow me on Twitter (@TradingLicks) and StockTwits!