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12 Step Pit Village Trader System for Picking High Probability Trades

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.

I also read a lot, particularly Reminiscences of a Stock Operator, SpreadBetBeginner and The Hovis Trader, along with quite a few other books and websites.

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:

  1. High enough share price to suggest larger movements
  2. Strong visible trends
  3. Recent support and resistance levels
  4. 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.

  1. Does a 1 Month Long Trend in the Direction You Want to Trade Exist?
  2. Does a 3 Month Long Trend in the Direction You Want to Trade Exist?
  3. Does a 1 Year Long Trend in the Direction You Want to Trade Exist?
  4. Is the 8 EMA Crossing the 21 EMA in Favour of Your Trade?
  5. On Daily Charts?
  6. On Weekly Charts?
  7. On Monthly Charts?
  8. Has There Been 3 Consecutive Days of Higher Highs/Higher Lows?
    (or Lower Highs/Lower Lows if shorting)
  9. Has the Share Price Been Higher Than It’s Current Price Before?
    (Lower if going short)
  10. Can You SEE Risk:Reward of Atleast 1:3?
  11. Does the Newsflow Support the Current Trend?
    (Google the co. and check news for the last 2 months)
  12. 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.

3/12 or 25% probability that this would go long so no good for me.

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…

 

 

 

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About Lee

Unconventional trader embracing intuition, martial arts & taoist philosophy to achieve two simple goals in life: Trade well. Be happy.

4 Responses to "12 Step Pit Village Trader System for Picking High Probability Trades"

  • Rogue Predator
    October 18, 2012 - 9:19 pm Reply

    Hi Lee, You don’t really end with any questions or ask for comments. So feel free to tell me to bugger off ,if this isn’t really the kind of blog where you want comments.

    One thing I found useful when I started trading was having an “Ocean” of stocks that I looked at everyday. These weren’t necessarily stocks that I looked to trade. But rather, stocks that I followed to give me a feel for what the economy and other traders were up to.

    Simplified example, if traders are in a hopeful/Risk ON mood, the following normally advance:
    – C.discretionary stocks, Tech
    – Commodity currencies like Australian + Canadian Dollar
    – Emerging market stocks(EEM) + small cap stocks($RUT)
    – Commodities like copper,oil,silver

    Where as when traders are in a fearful/Risk OFF mood, the above sectors suck and the ones performing well be things like
    – Currencies: Swiss Franc, Japanese Yen, US Dollar
    – Bonds particularly AAA corporate bonds & US, UK+German bonds
    – The VIX tends to rise
    – Defensive stocks like utilities, healthcare & consumer staples will out perform consumer discretionary and tech stocks

    By having a stable basket of stocks, you start to understand how markets can move based on what “themes” are currently in favour with hedge fund managers and other players.

    Example Ocean of Stocks
    This is a very edited version. But gives you an idea of what I’m talking about.

    *EPIC’s are based on what I type into Stockcharts.com

    Bonds
    $TNX: 10 year yield
    $TYX: 30 year yield
    Currencies
    $USD,$XBP,$XAD,$XSF,$XJY,$XEU,
    Index
    $SPX,$NDX,$INDU,$RUT,$SSEC,$DAX
    Commodities
    $gold,$silver,$copper,$plat,$wtic,$sugar,
    SECTORS
    XLY: C.discretionary
    XLP: C.staples
    XLE: Energy
    XLK: Tech
    XLI: Industrials
    XLU: Utilities
    XLV: Healthcare
    XLF: Financials
    XLB: Materials

    And then for the different sectors watch 2 of the main stocks for each sub-sectors
    Something like:
    CONSUMER DISCRETIONARY
    Retail: AMZN, BBY
    Casinos: LVS,WYNN
    Food: SBUX,YUM
    House stuff: HD,WHR
    Cars: TM,GM

    etc,etc you get the picture. As I said it’s not so much following stocks I want to trade. As it is being able to notice things like; the discount stores suddenly outperforming luxury stores, signalling possible economic weakness etc.

    I spent years manually scanning through a daily list like this every night. Boring as Feck!!! But still the best thing I ever did to improve my trading.

    or you can just start at the letter A…..like a crazy person;)
    Keep trading (sorry it’s so long)

  • Lee
    October 18, 2012 - 10:13 pm Reply

    or you can just start at the letter A…..like a crazy person;)

    lol…I guess I’m working on that!

    Thanks for your very insightful and wise comment. I’m sure this will be useful not only for me but to anyone who reads this post too.

    I’ll try this when I get some time to view some charts and try and build my own ocean.

    Very useful tip! Cheers

  • Sean (@srmatthews888)
    October 20, 2012 - 3:32 pm Reply

    This was interesting to read, its nothing I’ve really thought about before, but what does stand out is the direction of the defensive stocks and how this might dictate the mood of the market, ill be keeping an eye on this in future.

    No offence Lee, but your stock scanning looks a little bit pot luck, sure you can trawl through it for hours and find some good stocks, but I don’t think I have the patience for that.

    If anyone is reading this, I would be very interested to find out if there’s a way to scan UK and US stocks with a minimum/maximum price bracket, as this could give me an indication whether or not it is to volatile and expensive for my trading rules.

    Thanks
    Sean

  • Lee
    October 20, 2012 - 6:02 pm Reply

    Hey Sean,

    Haha…yep, id absolutely agree with you there, my stock picking is currently 100% pot luck. I know i can set up filters in advfn.com to pick out stocks based on quite complex criteria but i havent had time to set it up yet.

    Im sure you could set a max min price filter though so if you havent already you might want to give advfn a look. For a better look at advfn filters, check out this post on investor trader

    For me, i usually find a half decent stock in no more than 5 mins and over the course of a week ive normally built up quite a good selection of possibilities in my watchlists which makes the selection process a lot quicker down the line.

    Cheers!

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