Hi Mike,
Just finished reading The Playbook (after One Good Trade earlier) and felt obligated to send a thank you note. I really appreciate you offering this information out in the form of a book unlike anyone else really does in trading! It helped me build even more on my base trading knowledge. More importantly, it made clear the discipline required to be successful in this field and the roadmap of discipline you provided has seeped into my trading routine more and more. I’ve always spent time preparing outside of market hours and reviewing my trades, but having The Playbook review template to go off of really made my reviews more focused, so thank you for that. (edited)
My other question deals with biases. In premarket I develop trade ideas and try to rank my top 3. The problem is, sometimes my premarket bias is too strong and it hurts me when the stock doesn’t go the direction I expected and I am delayed in adjusting or flipping my bias.
For a real life example, most recently this happened in CE on Friday. The stock gapped up big on good earnings, but sold off in premarket to below its ATH and resistance at 65. Along with the SPY selloff, CE looked prime for a gap fade to me. Well I ended up failing twice short on this trade right at the open and then missed the easy $1+ move from 64.50 to 66.
Is there an easy solution to this or does it just take more screen time? I like to think I am fairly rational and have made money both ways flipping on stocks before. My tape reading skills are pretty solid too which helps. Its just tough because as you gain more experience and confidence, you expect your premarket biases to be correct more often, but there are just a few times where this problem just really hurts me and I know it is the next hurdle in my development. Wondering if you could give some advice on how to go about fixing this problem?
I really appreciate all the help you have already provided me through your books. They are very inspirational and it is great to be reminded that extremely good people do exist on Wall Street and that this game is not just about money and so much different than the old stereotypes!
Thanks,
Kurt
@MikeBellafiore
Wonderful to learn The PlayBook and One Good Trade has helped your trading. And so thoughtful of you to reach out and say so.
I see 4 plans of attack for you to trade with a bias:
1) Continue trading with a bias. Track your results. Work to improve your bias so there is more edge- we say a news edge. This generally requires access to more and better information about a stock, screen time and experience. Reading a few articles on websites is not a news edge. If you develop edge with this news edge trade then continue taking them.
For such trades you must be willing to take some larger losses and hold bigger winners. Aggressive traders may be more attracted to such setups.
2) Wait for price action to confirm your bias. Do not just trade off of your bias. Wait for a setup that confirms your thesis is correct. You will miss certain trades that tank or soar right on the open if you attack setups like this. But you will also eliminate rips where your bias was just plain wrong.
For such trades you should expect to be more consistent, but miss some trades from plan 1 above. Conservative short-term traders may feel more comfortable with this trade strategy.
3) Do not develop a bias and trade only off of price action. There are many excellent and even seven-figure traders who couldn’t tell you the name or sector of the symbol they were trading. They are experts in chart patterns and/or tape reading.
For such trades there can be losses that come out of nowhere and some even very large as you do not understand the stock’s fundamentals. But you will also stay in the trades that trend far too long than most expect because you do not let bias get in the way of the trade.
4) See two trades here and treat them differently. See the news edge trade. See the price action of a Stock In Play trade. Have different trades on with the same name with distinct rules.
I ask those reading: do you recommend trading with a bias?
*no relevant positions
3 Comments on “4 ways to trade with a bias”
I am looking for “evidence” type of bias for my trading ( trading above/below some statistical level , seeing volume and price move in the direction of that statistical point) , not expecting something to happen just because I want it to happen . To answer the question if I recommend to trade with bias I need to ask a question if what I am looking for is a bias at all ?
Yes trading with a bias is essential, its as simple as deciding “Long or out” / “Short or out”. Having bias ensures we are aligned with prevailing trend and we can objectively scale up our position sizing whereas not having any biases and betting big is a recipe for blood pressure problems.
I think trading a certain stock with a certain bias is fine. All it means is that you have done what you can to properly develop a plan for a trade, whether the stock has significant news out, or some other reason for you to wanting to trade it. The issue that might arise (say when the market opens) is if the stock isn’t quite going according to your trading plan, are you willing to ease up on your bias enough to possibly not take the wrong/losing trade, so that you might readjust and actually take a better trade that the stock is offering at that moment?
For me, bias sometimes can equal stubbornness. But I am trying to make sure my bias can be adjusted so I don’t take the wrong trade or miss better opportunities.