I learnt about Quint Tatro after seeing a YouTube video of a talk that he gave to traders at SMB Capital. I read up a little bit more about him and found out about this book, which had this interesting title.
I was expecting a book totally focused on trading other traders, and how to analyse what other traders were thinking or doing, but it turned out that the trade the traders part (i.e. trading pattern failures) is only a portion of the book.
The book goes through the major aspects of being a trader: doing homework (charts), developing a trading plan, setting stops, risk levels, profit levels, trade review, emotional control, avoiding blowups, etc. These are all good stuff that every trader needs to know or would already know (if not they would be out of the game sooner or later). As such, I felt that this book is more catered towards the beginner trader.
One interesting thing mentioned in the book was about Quint learning from Rev Shark, who introduced him to works of Bill O’Neil, Investor’s Business Daily, Nicolas Darvas, and Richard Smitten. These are also the same key influences for my own trading strategy currently.
One last thing to note, from my reading of the book and from viewing his talk at SMB Capital, my impression is that Quint is mainly a reactionary pattern trader (non-intraday). In his talk, he mentioned that he would literally go through thousands of charts every weekend, which I think is just amazing.
Angular Trend Lines are Created by Strong Demand / Supply
- For whatever reason, something that is irrelevant to you the technical trader, the stock does not retrace its entire 15% move. Instead after coming back toward the $10.75 range, the stock turns up again and advances to $12. The recent advance creates what is called a higher low, and marks the second inflection point needed to create our ascending angular trend.
- For whatever reason, traders were not willing to wait for the stock to give back the entire move and instead decided to buy up shares on the first sign of weakness.
- It is at this point, after the angular trend has been established, that you can seek to profit from the pattern.
Technical Influences on Patterns Come After Emotional Influences
- After the trend has been established, traders actually playing the trend influence it much more than do initial traders who have an emotional tie to the price point.
Three Methodologies for Capital Deployment
- Take a position in anticipation of a bounce or break occurring.
- For a passive / part-time trader.
- Higher returns, but lower probability of trade working.
- Not for trading pattern failures (i.e. betting that a pattern would fail).
- Take a position after seeing the bounce or break occurring (but still on the same day).
- Delayed Reactionary
- Wait until the trading day is coming to a close before executing an order, so that you make a purchase only after you are certain the break will hold.
- This improves the success rate of trades and avoids same-day reversals. This may help to avoid being whipsawed and stopped out the same day.
- The risk is that you might miss a significant move if the initial break transpires early in the day and continues to move aggressively all throughout the day. You should learn to gauge this based on the environment you are in.
- Passive strategy for part-time traders.
When Your Have an Edge, Increase Your Size, Not The Number of Trades
- Rather than increase the size of the casino floor, I just want to hone in on the time frame and patterns that I find most comfortable.
- I want to strive for perfection within this world, and rather than increase the number of trades I enter, I want to increase the risk I take per trade. I accomplish the same end results without the manic activity.
Plan Your Trade and Trade Your Plan
- You are human and therefore possess emotions that can alter your actions, especially when you see your money increase and decrease before your eyes.
- Simply put, you must have already laid out what you should be doing ahead of time so that you do not make snap decisions on-the-fly.
Key Variables In Trade Journal
- Stock symbol
- Long or short
- Stop level and reasoning
- Trade reason
- Risk per share
- Total risk for the trade
- Profit levels (profit taking levels)
- Updates and comments
Set Stops At Levels Which will Invalidate the Pattern
- I much prefer to set a stop based on a level at which the pattern that originally attracted me to the trade is no longer valid. To me, that makes much more sense and does not open one up to the susceptibility of being stopped out within a pattern that is still valid.
- For breakouts, the same trend line that was used to determine the breakout level may also be used as a stop level.
- For anticipatory trades, most of the time, you can find an alternative trend line on the opposite side of the level you are watching. It does not matter whether the trend line you are using to determine your stop is the same type of trend line you are using to determine the trade in the first place.
Pattern Failure Results in a Force in the Opposite Direction
- Consider the fact that you were not the only one who saw this pattern, nor were you the only one who acted on this pattern.
- The number of traders following this strategy could be significant, thus creating an incredible amount of force once the traditional stop on the failure was taken.
- Once the traditional pattern failed, you made your move with a much higher probability of reward.
- It has been my experience that trading pattern failures is best done only after the traditional pattern has in fact failed, thereby giving you a clear level from which to place your stop.
Pattern Failures May Be Rampant When a Trend is Obvious
- I believe that 2009 was a year filled with pattern failure. Most of the time, it was bearish patterns turned bullish that caught unsuspecting shorts off guard and resulted in incredible snaps higher.
Before Entering Any Trade, Set a Fixed Portfolio Percentage you are Willing to Lose
- For a $100,000 portfolio, risk per trade is 0.5% of the portfolio.
- For a much larger portfolio, which is susceptible to liquidity issues and being not as flexible, a typical risk of 0.2% of the portfolio is acceptable for each trade.
- For passive portfolios with a much longer time frame (weeks or months), a risk between 0.5% and 1% per trade is acceptable.
Book Gains and Raise Stops as your Trade Works in your Favour
- Gains are taken at one and two times my initial risk level for the trade.
- At each level, I sell or cover a third of my initial position.
- After selling the first one-third of the position, raise your stop to your entry price to ensure you do not allow a winning trade to turn into a losing trade.
- After selling the second one-third of the position, raise your stop to your first profit target (i.e. one times initial risk level)
- The final third of the position is allowed to move freely.
- Although you will never hit the proverbial homerun, the multitude of singles and doubles will result in what should become a continuously rising equity curve.
- I strongly encourage all strategies to include two basic principals: booking partial gains as the stock is becoming profitable and raising stops to ensure profits do not become losses.
Go for a Steadily Rising Equity Curve over Swinging for Home Runs
- There was a time in my trading when I would swing for the proverbial fences, seeking outsized returns by taking outsized risk. The results were erratic and at times yielded great returns, but rarely allowed for sustained progress. Regardless of how great the success, it seemed I always went through extreme periods of heavy drawdowns.
- This emotional roller coaster led me to develop a trading system that seeks much more consistent and sustainable returns. Over time, this resulted in a steadily rising equity curve, correlating with a much more balanced and unemotional approach to trading.
- There is something invigorating about seeing a continuous flow of profits into my account.
Use Moving Averages to Identify the Trend
- I usually review the S&P 500 daily chart to determine where the index is in relation to its 50-day simple moving average.
- If the index is above this line, I assume the trend is up and I look for buying opportunities.
- If the index is below this line, I assume the trend is down and I look for shorting opportunities.
- If the index and its relation to the 50-day moving average suggest a specific direction but this conflicts with my personal view, I do nothing.
Handling Blowups – Remove the Position
- Through the years, I have learned that when the blowup ensues your natural tendency is to freeze. You begin by hoping the blowup reverses course and that your misfortune will be restored (and so you take no action at all). You immediately are stuck in a hope trade and will more than likely begin watching each and every tick of the stock in question.
- Your zombie-like state will not only paralyze you from taking action on the particular stock but will hinder you from playing any other areas.
- My primary goal has remained the same: remove the position as quickly as possible so that I can psychologically and financially accept the loss. After the position has been removed, I then move forward looking to repair the financial damage in [using] other areas.
- Whenever I face a blowup, I immediately take off one-half of the position.
- While most stocks never returned to where they were before the blowup, some did improve from their initial price immediately following the blowup. Based on this observation, I decided to hold at least one-half throughout the day with the goal of removing the balance by the day’s end.
- Earnings announcement
- You must get into the habit of checking when your stocks report so as to not be caught off guard.
- A company’s earnings report is usually a catalyst for a large move, and your success should never depend on guessing this outcome.
- I never hold more than one-third of a full position in a stock through a company’s earnings announcement. In fact, I prefer to not hold any shares at all.
- I will pass on a trading opportunity if I see their earnings release is too close to the date for which I’m pondering the trade.
- Special events
- E.g. FOMC meeting, employment report, government change.
- Reduce my exposure dramatically prior to this taking place.
- Rather than bet on the outcomes, I prefer to see how the action transpires.
- I generally choose to avoid the sector altogether.
- For every solid winner, it has been my experience that there are four or five terrible losers.