All gamblers think they have a system until they lose all of their money. I’m yet to find out if I fall into this category or not, but as one of my readers put it yesterday, I’m not a gambler at all, I’m a speculator. That’s why my system is different…
Famous last words or what?
I’ve been wanting to write this post for quite some time. I’ve had a lot of people ask me how I pick my positions or to tell them more about my system. The truth is, until fairly recently, I couldn’t really answer either with any real integrity.
Reason being, I didn’t actually know – at least not enough to commit to it and say ‘this is what I do’.
Now though, I think I am in a position where I can talk about these things because for the first time since I started trading back in March 2012, I do now have a set of rules that I check all of my trades against before I open them. The output of which is a score, which I then (very non-mathematically) convert to a probability.
If there’s more probability of things going my way than not, I’ll open the position.
These rules are my own, based on my very short time trading, and I came up with them by looking back over 145 trades I made. Out of the 145 trades, I picked out all the good ‘winners’. This is a bit arbitrary though, because now I class some of my losses as ‘good trades’ when I close out losses early.
Anyway, for ease of explanation, I went through all my trades and picked out the ones I made money on.
The culmination of this knowledge and experience resulted in what I am calling (quite original, I’m sure you’ll agree) my PVT System (Pit Village Trader System – for those that missed the reference ;-)).
The 12 Step Pit Village Trader System
The point of the system is to help me identify positions that I think, based on my experience and other people’s knowledge, have a greater probability of heading in my direction than not heading in my direction. The system is designed to work in equity markets only, and is applicable to both longs and shorts.
I believe the cycles and behaviour of commodity markets, forex and all the other markets behave differently to equities, and I wouldn’t dream of trying to apply this system to those markets. Ha, I’m lying! Of course I’ve tried it in these other markets – and I’ve lost money. That was enough of an answer for me.
So, to reiterate, I believe this is only valid for equities, because other markets exhibit other behavioural patterns. As a side note, this whole topic of market behaviour fascinates me and I’ll no doubt return to this in future posts. #Random.
Which leads me onto the actual system itself. I guess you could say there are 2 stages to it.
Stage 1. – Finding Equities to Trade
I’ll be honest, my approach to finding positions is akin to throwing a dart at a dartboard without aiming and seeing where it lands. In practice, this means I pick a letter of the alphabet and then go through each company in that letter until I see one that looks interesting in my IG Index trading platform.
Now I know there are better ways to do this, like setting up filters in ADVFN or other screening software, but I’ve not progressed to that stage yet. I do look for the following though:
- High enough share price to suggest larger movements
- Strong visible trends
- Recent support and resistance levels
- Potential risk/reward ratio of 1:3 (1Risk:3Reward)
I thought about writing down exactly how this process happens but then I realised it’d make a pretty boring segment of this post, so I video’d it instead 🙂
Stage 2. – Running Candidates through the PVT System
Once I’ve added about 5 or 6 positions to my watchlists, I then apply my PVT Filter to each of them to identify which one is most likely to go my way. I do this using a simple 12 point checking system, where each point represents what I think gives the position more probability of doing what I hope it will.
I think this system might evolve as time goes by, as I get better at trading, and should always reflect my most up to date knowledge. Maybe I should keep an easily accessible copy of this available on this site so people can always download the latest? Tweet me your thoughts on that idea.
The system is simple. Each question has a yes/no answer. The tally of yesses at the end gives a score which I then magically recalculate as a pseudomathematic probability – sounds cleverer that way.
- Does a 1 Month Long Trend in the Direction You Want to Trade Exist?
- Does a 3 Month Long Trend in the Direction You Want to Trade Exist?
- Does a 1 Year Long Trend in the Direction You Want to Trade Exist?
- Is the 8 EMA Crossing the 21 EMA in Favour of Your Trade?
- On Daily Charts?
- On Weekly Charts?
- On Monthly Charts?
- Has There Been 3 Consecutive Days of Higher Highs/Higher Lows?
(or Lower Highs/Lower Lows if shorting)
- Has the Share Price Been Higher Than It’s Current Price Before?
(Lower if going short)
- Can You SEE Risk:Reward of Atleast 1:3?
- Does the Newsflow Support the Current Trend?
(Google the co. and check news for the last 2 months)
- Is Broker Concensus with Current Trend?
(I use IG Index’s ‘Insight’ platform to show me this)
And that’s it. I told you it was simple.
Just to complete the example, in the video above, I added Gold Fields Ltd (GFI) to my watchlist. I ran the position through the 12 Step filter above and came out with a total score of 3/12 (25%).
Based on this score, I would have opted out of this position and not opened it (good job too because later in the day the Share Price fell through our marked support level which meant we would have been stopped out).
And that’s pretty much the PVT System. So far, it seems to be working, but only time and profits will pass final judgement.
Conclusion: Does this Make me a Gambler or a Speculator?
Whilst all of this sounds good, it’s still pretty clear that I can’t know for sure if a position will move in my direction or not, regardless of how good my system is. I guess this means I’m actually just guessing, which would suggest that I’m nothing more than a Pit Village Gambler.
However, and this is my final thought for the day, I promise; just because I don’t know the outcome of an event, it doesn’t make me a gambler. If that were the case, almost every decision we make, in every day of our lives, would make us all hopeless gamblers.
But maybe that is the biggest untold truth of them all…