There’s two main avenues to becoming a trader. Being discretionary or being systematic. Being systematic has many advantages, for one it is far easier to maintain discipline when there is no discretion in there trading process. Of course this can be circumvented by creating a set of rules to follow and strictly adhering to them and using a discretionary approach apply those rules to subjective understandings of situations. And that’s what this article is about, creating a list of rules to follow for the majority of you who are likely discretionary traders.
The reason why I wanted to write this article is two parts: one I will be releasing some trade ideas in the near future and I want people to be better prepared to manage entries and exits and helping people create a rules based guideline to doing so is the most prudent thing to do before I release those. After all, no matter what you are doing in a market it eventually comes back to risk management and ensuring your emotions and expectations are in check. The second is that I want to be able to highlight the advantages of being systematically discretionary.
With the trades I highlight I won’t always give advice on entries, exits and managing the position. That’s why I want to highlight some of the rules that I abide by in hopes that it inspires people to create their own. From these rules you’'ll be able to quickly tell that I’m a big proponent of using technicals for entry and exit planning but not so much the hold phase.
Never enter a full position that’s more than 2% away from the 4 day ema. This is a quick indicator of overbought/oversold conditions. I’m not a fan of using RSI, so this may change for you. Whatever the case, you want to figure out a way to identify overbought/oversold conditions and avoid entering into a full position.
I like targeting an average entry of around the 8 day moving average, adjusted for expectation of fair value. I will never enter into a full position under the 200MA and I like using the 50MA as a stop loss target in the early days.
If I’m buying below the 50MA, I will use a 20% stop loss and I try not to let losses get much bigger than 1% of my AUM.
Whatever my target average entry is, I want to make sure that I have at least a 1.5X ratio in reward vs risk. That could be through stops vs. target price, trade structure (i.e options), whatever way it happens I want to make sure I have at least 1.5X but often I want higher. This is due to hit rates, the best investors often have a hit rate of 65-70%. A realistic hit rate will more likely be 50-60%, so we need to plan accordingly with risk-reward. From there we need to not let wins make us too cocky, or losses make us gun shy. It’s all a part of trading. When I’m in a rut, I seek out easier opportunities and try to just hit singles to build up momentum for when you find an opportunity worth swinging for fences. Just make sure you know what a winning or losing streak does to you and adjust actions accordingly.
Be dispassionate about all positions and be aware of argument for the opposite side of your trade. We need to be able to accurately assess new information and that can only happen with an objective eye. Don’t be afraid to admit you were wrong and 180 on a position. On the flip side, if you see a thesis working and your size is small, increase it. Knowing when things are going right is just as important as knowing when things are going wrong.
We want to embrace right tail optionality, not remove it. When a position is working, the only limiting factor should be portfolio concentration limits if you have them.
There can obviously be more rules, different rules or even no rules! Ultimately it’s up to you and what fits you’re personality.
Now let’s talk about being a mix of systematic and discretionary. If you’re a generalist like me with an overarching macro theme to your portfolio, it pays to be a mix of systematic and discretionary. So let’s take a step back for a minute and really nail down what our process is as a trader. In my opinion it comes down to 3 parts, research, synthesize and trade. We need to research the constantly changing environment and how that translates to asset prices in order to identify ways to make money. For many of us, trading might not be our full time job. Or maybe it is! Regardless we want to use our time efficiently as possible, so in order to do this it’s a good idea to systematize our research into a framework or models to function as a continual source of information that requires little time investment from us.
When we think of models we automatically think of excel models or coded strategies when really all a model is, is an informative representation of a system. However you build that might be up to you. The good thing is that in today’s age it’s never been easier to create models! With the help of AI, or finding people on the internet, coding strategies is now extremely accessible to everyone along with utilizing excel. The end goal of the model is to provide you with the information needed to go to step 3 which is trade.
Depending on the models you build they might tell you exactly what trades to make or they might just output information for you to make decisions based on. Personally I like a mix of both for different strategies utilized in a portfolio, which I will write on one day soon. That’s all for now, I hope you have a good weekend and I hope to release the trade ideas soon when optimal.
Thank you so much for reading! If you haven’t done so, please like and subscribe, it really helps with growth! If you’d like to stay more updated on trades or other ideas that might not warrant a full article then follow me on twitter here. Alternatively, I’m a part of a discord that is completely free. It’s just a collection of traders from all different backgrounds that talk about the markets, so come check it out here!