The 30-Minute Stock Trader

by Laurens Bensdorp

  The belief that you don’t make mistakes, because you’re perfect, or you can’t make mistakes, because then you’re “bad,” is trading suicide. A strategy that is only “right” 30 percent of the time can be the perfect strategy, if your winners are five times larger than your losers.

  Intellectually, this is easy to understand, yet people still fall prey to these biases. Just because you know something doesn’t mean you’ll execute it when your psychology and emotions come into play. You need to understand deeply that wins and losses aren’t measured by individual trades; they’re measured by how perfectly you’re executing your strategy. It’s not the profits on a single trade that will make you rich. It’s the net balance of all of your wins and losses, and how big each one is. Keep your losses as small as possible, and maximize your wins. Your strategy will take care of this, if you follow it.

  Success has one definition: How closely are you executing your strategy, and trading within your risk tolerance? That’s the only way you can grade yourself.

  When creating your own personal strategy, be aware that every trading strategy is different (long, short, combined, etc.) but has the same twelve ingredients. Even fundamental traders, which I don’t work with, should use these same twelve steps. The better you can define these twelve steps, the easier it will be for you to understand every part of your strategy and therefore execute it.

  In part 4, we’ll go through each strategy I teach, specifically. For now, I’ll give a brief overview of each of the twelve universal ingredients.

  1. Objectives

  We’ve discussed personal objectives (how much money do you expect to earn, long term?), but not the objectives of your strategy. Both are important.

  Let’s say you’re going to trade a long-term, trend-following strategy. You want to always be positioned in the high-flying, uptrend stocks, capturing as much of the move as possible with particular trends. Therefore, your top objective is to ensure you’re making a huge amount of money when the market is going up. You need the opposite objective, too, to be realistic: You will get out as your strategy has determined the trend is over. That’s how you execute a trend-following strategy, by defining how to maximize wins, while accepting losses and cutting them as short as possible.

  Before you test, and eventually trade, a strategy, you need well-defined objectives of what you hope to achieve. In order to trade a strategy successfully, it needs to be built on your beliefs, which work toward your objectives.

  There are four types of objectives you must define: psychological, operational, personal, and strategy. Strategy objectives can be split up into single (for one strategy) and multiple (for a suite of strategies trading simultaneously).

  Psychological objectives are set so that trading your strategy never affects your mental state. That involves setting your maximum drawdown, CAGR, trade frequency, if you will take any profits out of your strategy, and if you care about having a high win ratio, versus a high win-loss ratio. The higher win ratio you need, the better off you’d be using a mean reversion strategy with a profit target. A high win-loss ratio would mean the average winning trade is larger than the average loser, which would mean you should use a trend-following strategy.

  Basically, if you prefer more wins of smaller magnitudes, you’ll prefer a high win ratio (mean reversion with profit target). If you prefer fewer wins of larger magnitudes, you’ll prefer a high win-loss ratio (trend following).

  Operational objectives are set to ensure you can operate your strategy stress-free, in a way that suits your lifestyle. Will you enter trades weekly, or daily? Some people like to do it intraday. Do you want to enter the trades yourself, automate them, semi-automate them, or hire someone?

  Personal objectives are important, too. Will your spouse, children, or other family members influence your trading strategy? Does your spouse work at an investment bank, where he or she can’t ignore benchmarks? That could cause problems in years where there are big bull markets.

  Next, strategy objectives. If you’re going to trade multiple strategies, what are the single objectives for that strategy? What does it do? How does it react in bull markets? What about bear markets, sideways markets, volatile markets, quiet markets, and normal markets? What about different combinations of those? You need to plan for every possible scenario. Once you start combining strategies, you have to make sure your strategies work well with each other. If you have a long-term, trend-following strategy and then develop a short strategy, does one make money when the other doesn’t?

  When trading multiple strategies, it’s important that they’re designed to help each other. They’re like partners, complementing each other’s weaknesses.

  All of my students who fail to define their objectives struggle to create a strategy. Once you do, you simply use the indicators to measure price action, define your rules, and get going.

  Most people want the highest possible return with the lowest drawdown and think that is their main objective. That leads to the creation of strategies that don’t suit their psychology or objectives. They self-sabotage themselves to bankruptcy.

  2. Beliefs

  Your objectives are linked to your beliefs. For example, trend following is a sound belief that the markets are mostly trading sideways. However, when they trend, you can make huge money if you capture the trend. Your objective could be to capture just 25 percent of the moves, because profits are so big. You’ll need a profit target in your objectives, so your indicators and rules can tell you what to do. Another belief could be to buy fear when everyone is panicking, because there’s a larger than normal likelihood that the market will revert back to its mean. Those are two core, simple, yet effective and proven beliefs. For every strategy, you need to understand the underlying core belief and market principle. If you aren’t clear on the belief you’re trading, you’ll lose confidence and fail to execute.

  It’s essential to test your beliefs and make sure they’re based on sound market principles.

  You’re not trading the markets; you’re trading your beliefs. Inside the stock market, you’ve got hundreds of thousands of people, each with their own opinions. Maybe 5 percent of them really make money, but 100 percent of them have beliefs about where the market will go. In order to make money, you need to hypothesize beliefs, back test them to see if they’re true, and if they are, develop a strategy based on those beliefs. The market does what it does. It doesn’t care what you think. You can only trade according to your beliefs, and you’ll only make money long term if your beliefs are scientifically and logically true.

  Often you’ll start with a belief, back test it, realize it doesn’t work, but in the process, see something else that works. For example, you might start with the beliefs that buying the highest high of the last twenty days has an edge, because the Turtles Group used to trade that entry signal. The Turtles Group had been extremely successful in the futures market in the 1980s, and that belief seems sound. But if you back test, you will see that while it made huge money in the 1980s, it has mainly been flat, with some huge drawdowns, ever since. However, you’ll see that a larger timeframe like one hundred or two hundred days actually works, so you can shift to that belief.

  By documenting and tracking your trades, you’ll develop new beliefs and get stronger evaluations of your current ones. At least once a year, you should reevaluate your beliefs and make sure they are all still sound—that nothing has changed. That doesn’t mean you should change parameters frequently, but you should monitor things occasionally. If you start seeing statistically larger-than-expected downturns, you may need to scrap and redefine your beliefs.

  3. Trading Universe

  Are your objectives and beliefs clear? Move on. What are you going to trade? This book only addresses stocks, but of course there are other instruments you can trade. In the United States, we have over seven thousand listed stocks. What’s your trading universe? Do you want to trade the complete basket of NYSE, American Exchange, and NASDAQ stocks? Do you wa
nt to trade an index like the S&P 500 or NASDAQ 100? They all have their pros and cons.

  If you want to trade a high-frequency strategy, it might be easier to have a large portfolio. Therefore, you’ll need a larger universe to trade within. The same goes for mean reversion; since your expected profit per trade is low; you capture a short profit, get out, and repeat frequently. You make numerous, frequent trades—trading mean reversion on a small index like the Dow Jones can result in some great trades, but you won’t have enough opportunities to make a significant profit. Generally, the larger the universe, the more trade opportunities. You need a ton of opportunities for mean reversion to be worth trading. Twenty trades a year will not do enough for your finances, regardless of how many of them are winners.

  If you want to trade a long-only strategy, you’re basing it on the belief that since indexes rebalance every three months, the weaker companies are kicked out. That might be information that would benefit you when developing a trend-following strategy. Trend following is the opposite of mean reversion, because you’ll stay in one position for a long time, but capture a big profit.

  On the other hand, it’s OK to use trend following on a very large portfolio, with strict selection filters. You can trade trend following on the complete stock universe, but you need more filters to get the stocks you really want.

  That’s why I recommend adopting the belief that you need an index, even though there is nothing wrong with including stocks not yet in an index. Microsoft, for example, was a tiny stock when it started—not yet it an index. Therefore, it’s fine to include early stage stocks in addition.

  4. Filters

  You need a filter for liquidity, to ensure there’s enough volume to buy the stocks your strategy dictates. It depends on your account volume, though. If you have a $50,000 account, you can trade fairly low-volume stocks (average trading volume of ~100,000 shares). If you have a larger account, you can’t trade those stocks. You would move the market too much with each trade. One idea is to set your volume filters based on your account size. Another one is to make sure you have a filter to never trade more than a small percentage of the average dollar volume. For shorting, volume is even more important, because you need decent liquidity—you need to have some shares that are available to short.

  If you have a lower account, you actually have an advantage, because you have access to stocks that the big players don’t have access to. That is a huge edge. Use it if you can.

  You also need a minimum price filter. Some people don’t like penny stocks, so they’ll need to set a higher minimum price.

  Lower-priced stocks move differently than stocks trading at, say, thirty cents. If you trade a stock that is priced at eighty cents, expect crazy moves and volatility.

  You need a volatility filter. I think it’s smart to filter out stocks at the extreme ends of both high and low volatility. That’s a controversial belief, because some people think that using volatility-based position sizing is enough. I think you need some filters, because if you’re selecting a stock that has an average volatility that’s twenty-times less than the S&P 500, it will not move at all and won’t help you. Trading on the higher end is possible, but it provides us with margin issues. Setting volatility filters beforehand is safe. Based on your beliefs and objectives, you’ll decide what kind of volatility you want in your portfolio.

  5. Setup

  You need to define the exact rules of what the movement of a particular stock should look like before you enter a trade. We only use end-of-day price action data, so we ask: Which numbers will fulfill our rules that tell us which stocks to buy or short the following day? An example setup could be to buy a trend that is closing above the two-hundred-daily moving average—or short sell a stock that is highly overbought. A setup can define a trend, a pullback, or anything else, as long as it defines a clear situation that fulfills a set of criteria that tells you what to buy or short sell the following day.

  If you have clear beliefs and objectives about what kind of entry you’re looking for, then you just use a technical indicator that does what you want. If you know what your entry needs to look like—say, your objective is to enter a trending stock—use a technical indicator (moving average, highest high, etc.) to quantify your belief and objective.

  For example, if your belief/objective is to find stocks that are oversold, because they’ll revert back to their mean, you need an indicator that measures that. You could use the Relative Strength Index (RSI), buying when it dips below a certain threshold.

  Define your beliefs and objectives first, then look for indicators that help quantify them.

  6. Ranking

  There will be times that your strategy generates more setups (suggested trades) than your position sizing allows. It could tell you to make fifty trades one day, but your position sizing (risk management) only allows ten. You decide which ten to trade based on your ranking parameters.

  It depends on your strategy and preferences, but you could trade the ten stocks with the highest volatility, lowest volatility, largest rate of change, the most oversold, or perhaps the strongest short-term trends.

  For a mean reversion example where you buy pullbacks, you could say you want the ten pullbacks with the most volatile movements, or the most oversold, but those are different things. It can make a big impact on what you trade, so you need to define this beforehand.

  7. Entry

  Next, define your entry for situations in which the setup requirements have been fulfilled and you need to place an order. How are you going to enter the stock the next day? Will it be when the markets open, or does it need to advance for a certain amount, like a percentage or average true range? Or does it need to drop even further down? Is it a limit order? Is it a market order? Define this beforehand.

  In part 4, I’ll show you specific rules for each strategy, which should clarify these generalizations.

  8. Stop Loss

  When entering a position, you must have a predefined exit point, in order to limit your risk. This ensures that you don’t stick with your losers if a trade doesn’t work out as planned. You acknowledge your losers and sell them, taking your losses humbly, and moving on. That’s a long-term win, despite feeling like a loss.

  9. Reentry

  After you get stopped out and sell a stock, will you reenter the stock immediately if it gives another signal? Or will you decide to hold off for a certain amount of time? It depends on the strategy. You could get the signal the day after you sold, which makes people uncomfortable. If you won’t want to buy a stock you lost on, you had better put a rule in there. If there is a statistical edge to reenter, which is something you should have tested, you must obey your strategy and buy anyway.

  10. Profit Protection

  If you’re in a trade that becomes profitable, will you have a set point in which you’ll protect your profit? You can do this via a trailing stop, which will sell the stock when it loses more than X percent from its highest point. The trailing stop will move as the stock price rises. It’s a way to protect your profits if a stock suddenly drops down.

  11. Profit Taking

  People who can’t escape their ego and need to feel good about having as many “wins” as possible should set a profit target. You can say beforehand, for example, “When the stock achieves a 20 percent win, I’m getting out.” It depends on your beliefs, objectives, and personality, but if you define it beforehand, it’s fine. There are great strategies like this—they of course have smaller profits per trade, but they have higher win rates.

  12. Position Sizing

  Position sizing is what determines how much you are going to invest. Which strategy or mathematical algorithm and rules are you going to use to define the sizes of your positions that you trade? This is essential, so that you achieve your predefined objectives. I’ll explain them in part 4, but the various strategies define your optimal risk. Proper position sizing is crucial, to ensure you make the most of your proven rules.

  In t
he following part, we’re going to show a variety of different strategies—each with different beliefs and objectives, suited for a variety of people. All of them have great edges and have been tested over a long period of time; the one you’ll use simply depends on what you want—the one that most suits you.

  Then, we’ll show you how to combine the individual strategies into a suite of noncorrelated strategy, which multiplies your edge exponentially. That’s because the strategies all perform differently in different market types, and as you know, the markets are crazy and unpredictable.

  It’s much easier than you think, and all of the strategies use simple, straightforward rules. Each one is an example of a strategy I’ve built, or helped clients build in my Elite Mentoring program, through my Trading Mastery School.

  Are you too busy to enter and exit trades during the week? The Weekly Rotation strategy only requires you to enter trades on weekends.

  Or maybe you just have better things to do, or you’re lazy. That’s not a problem, as long as you account for it up front. If once-a-week trading fits your lifestyle best, or you don’t want to be involved in the markets on a daily basis, this is the strategy for you.

  It’s also great for people with IRA or 401K accounts, because they can trade long only—and this strategy is long only.

  If you listen to or watch the news, or are exposed to a lot of outside noise through work or social settings, this strategy will help. You’ll mainly be in high-flying stocks like Netflix and Tesla—strong companies that attract positive media coverage.

  It’s a simple strategy that anyone can follow.