I’m a serial tinkerer with trading strategies, particularly in index options trading. In most cases, I’ll start with a simple concept and iterate from lessons learned along the way.
Each iteration is done with good intentions as I’m finding holes in the process and trying to fill them as I go along. I’m like a deckhand moving around the boat, patching small leaks with spackle.
This goes on for a while. And it happens slowly. But like compound interest, it grows stealthily… then mightily.
Unfortunately, I too often find myself in a situation where my PnL is going the wrong way and I’m suddenly handcuffed because I’ve created too many patchwork rules that are doing nothing now but causing confusion and slowing me down.
As many of you know, something we've been working on internally is using various bottom-up tools and scans to complement our top-down approach. It's really been working for us!
One way we're doing this is by identifying the strongest growth stocks as they climb the market-cap ladder from small- to mid- to large- and, ultimately, to mega-cap status (over $200B).
Once they graduate from small-cap to mid-cap status (over $2B), they come on our radar. Likewise, when they surpass the roughly $30B mark, they roll off our list.
But the scan doesn't just end there.
We only want to look at the strongest growth industries in the market, as that is typically where these potential 50-baggers come from.
We all read them and they mess with our heads. It takes steadfast resolve to listen to the message of price action when everything else we read tries to trick us into doing the wrong thing.
The best way to keep ourselves level-headed when taking risks is to define that risk and trade small. There are few things more powerful than knowing with complete certainty the most I can lose, no matter what the market throws at me.
With this in mind, we're putting on a trade today in a stock that has the potential to be a real highflier if the markets stabilize and head higher following any Washington drama while limiting our risk in case we're early or wrong.
