Find the right trading setups

In improve trading discrete collection, TraderPetri by Petri Redelinghuys

Sometimes it feels as if I have run out of trading ideas. Especially when the market has thrown me from pillar to post for a few weeks and has taken money from me. I become prone to taking trades that ‘look good’ without actually doing the leg-work required to properly validate the trade.

To avoid this, I need to remind myself to take the time to find the right trading setups. There are a few factors that need to be just right in order for a trade to be deemed a ‘high probability’. As a result, finding the right ones takes time, patience and effort.

The last four or so weeks have been rather tough for me. Other than a big win on an Aspen short, the majority of my other trades I’ve either stopped out of or are currently running against me. This puts me in a precarious position and in danger of making irrational decisions.

The sure fire way to avoid costly mistakes is to bury myself in the process of relooking at the entire universe of shares that I am trading in. This does not mean that I need to only re-consider my share universe after a losing streak; it should be reviewed every single month. It does however take me out of the market for a period. Allowing my mind to reset itself and also allowing me to find those trades that really count.

To start off I will look at each industry, at the monthly and daily charts, to see if there are any major trends that are changing. Next I will look into each industry to find the best and worst performing shares in each sector. This allows me to have a list of potential longs and shorts to read up on. This is the boring part, but probably the most important. I need to read the last few years’ worth of SENS articles and get a firm grip on how the company makes money. I also need to compare some of the key ratios against those that I deem to be in line with what I require from a share to be able to go long or short it. Some shares will fall off the list and some will stay.

What I am then left with is a list of shares that I am comfortable to long and short, depending on what the overall index is doing. This whole process is sort of on-going, although I think that taking a day or two ‘off’ to spend the time digging through the market can only be helpful to my mind-set and bottom line at this point in the game.

Happy trading!

Trader Petri

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