My Secret Sauce, ‘I put that sh*t on everything!’

Everyone and their grandma is looking for that secret sauce, the holy grail to trading, to put it in simple terms, the ‘edge’. Today’s write up I want to talk about that. I have learned from a lot of gurus and successful traders for my past year and a half of trading, most of them are all able to do one thing, and they encourage you to do the same as well; being able to articulate what your edge is, simply use that on a day to day basis, and you will have success.

I would like to define what an edge is though before we go any further, as there is a lot of misconceptions about what an edge truly is. Some think it’s a magical formula, some secret sauce, when in fact that is soooo far from the truth.

Edge: A trading setup that has a higher probability of the stock price going in one direction over the opposite direction.

I was a semi-pro poker player about 10 years ago. I studied day in and out on the subject, played 12+ hour days, learned to deal cards and dealt poker as well in underground poker clubs, as well as ran my own underground poker club. Lots of online screen time playing on Pokerstars and Fulltilt. I would track my previous played hands to death. In any given poker book offered out there, they will all say that when in a heads up(1 on 1) situation preflop, if you hold pocket Aces, you have an 85% probability to win the hand. That probability would be your edge. Over a long period of time, if you were to only play that edge, you will come out a winner.

The trading edge though, is not as simplistic as just 2 cards unfortunately, there are many variables that I had to factor in when I was looking for my trading edge. And I intend to share it with you in this post. Note that just because this trading set up is what I feel comfortable with, it doesn’t mean it applies to everyone. Trading is a lot of personal preference just like wine. Hopefully by showing you what I believe is my edge will help guide you to find your own.

Ask anyone who knows me personally as a trader, they will let you know that I’m mostly a short bias trader(short selling stocks and make profit when the stock price comes down). There is a very good reason for that. Human nature, it dictates that we are genetically programmed to avoid danger and harm. When a stock starts decreasing in price, it triggers discomfort, fear, and emotional panic. Those who cannot withstand this pain usually take the quickest way out. They sell! With a majority of the market made up with people who are susceptible to this emotion of fear, you now understand why I choose to short instead of buying.

Let’s say you just bought a new iPhone for $1k, it took you a lot of time to earn that money, you probably took a while debating on whether you wanted to make that purchase in the first place. All of a sudden, some random guy offers to buy it off you for $2k, will you still take as much time as you did making a decision to buy it as you would to sell it? Here, give me the money, take the phone, insta sell! Human nature dictates that it’s easier for us to make a decision when selling over buying. Moreover, this emotional trigger happens most often when price of a stock suddenly increase with overwhelming speed.

Psychological numbers. Whole dollar amounts. When you go to the grocery store, will you be more inclined SUBCONSCIOUSLY to buy something for $9.99 over something that’s priced at $10.00? This is the psychological effect of whole numbers. The whole world is susceptible to this consumerism pricing effect. Knowing that, I integrated it into my edge. When I look to enter a short trade, I’m always looking to get my entry as close to if not spot on the whole number that the stock is running up to. Knowing that this psychological effect would work in my favor most of the time.

Resistance. This is a price point of a stock where there was an overwhelming supply of the security being traded. It is usually at these price points where traders tend to sell. Too much supply, not enough demand, causing price to have to come down lower in order to get more buyers interested. When I'm analyzing a chart, I look back on the chart history and try to determine where key resistance points are located.

Mid to large cap stocks. There is a big misconception out there in the trading world, stating that there is no edge in trading the larger cap stocks. Some say it's because when we trade these stocks, we are competing against the large institutional traders(I call them Big Boys) with their fancy software and massive buying power.  Those who believe this theory tends to shy away from the mid to large caps and trade penny stocks instead knowing that the institutions don't care for or trade penny stocks. In turn they are competing against other retail traders who are less experienced.  I used to be brainwashed and believe in this theory as well for the longest time.  After trading penny stocks for a few months without success, I went back to thinking about this theory and was dumb founded after a lot of sleepless nights of reflection and contemplation.  Who says I NEED to COMPETE against the institutions?!  Knowing that the Big Boys wins most of the time, why can't I trade along side them instead of going against them? 80% of the market is composed of these institutional guys, the hedge funds, the banks etc etc. The best part is that they are very experienced in trading and stick to the technical rules of support/resistance and moving averages to the 'T'. This makes them a lot more predictable! All I have to do is understand these same technical analysis that they follow religiously, and I would be able to come up with a thesis of what they will do next most of the time. This is definitely an advantage. When trading penny stocks, you are in a market with a bunch of inexperienced traders who probably just started out, don't know anything about technical analysis, and just buy or sell purely on their own emotional perception of the value of the stock. Try predicting that randomness. It's impossible to know exactly how everyone is thinking at the same time.

These are the ingredients of my secret sauce, my aces. To articulate it:

'My edge is to SHORT MID-LARGE CAP stocks that are RUNNING UP VERY FAST into WHOLE NUMBERS which are also KEY RESISTANCE levels.'

I'm looking for a quick price wash down, not necessary by a lot, but just close enough back down to a level where I think buyers' interest will come back in.

Now that I have picked apart what is needed to develop an edge, I hope this will help you out in developing your own.  In my next entry, I will talk about something how to set PROPER trading goals to help you reach a consistent winning level. I will distinguish what goals actually hurt your trading and what goals actually help. Stay tuned.

To close, I would like to kindly ask you to please consider keeping me motivated, and caffeinated in my continuation to deliver my FREE content about my trading reflections, if you find my content helpful to you. Thank you for your time and for reading.