Thursday, January 27, 2011

Information Flow, Free Ideas and What We Do With Them

I recently read some interesting posts out in the blog world. One was from DynamicHedge about the cost of free information and why he'll never give out his best trading ideas for free. I agree with him - why would you give out your best for free? But then again: what's an idea worth? Surely, there must be some value there. But in order for a trading/market related idea to have value, you have to do something with it. Someone could tell me a about a perfect setup or a very compelling study. But if I don't do anything with it, then was it even worth anything? I write out my ideas for me; it's a helpful process to think out loud through the web. Sometimes I'm not even sure if I even have a good idea or not, but the process of writing usually clears that up. Before an idea can be deemed good or valuable, it comes back to a person's perception of that idea and what they do with it.  On Sunday, I wrote about a bullish scenario for the NASDAQ setting up this week. It sounded like a good idea to me, but not that good where I thought I was giving away some super edge.  If you trade the NASDAQ, it probably had value to you. But if you're a pennystocker or breakout trader or forex mover, maybe not so much. So good ideas can add zero value, depending on the trader. Additionally, for an idea to add value, it doesn't always mean that action needs to be taken.

That thought takes me to something I read on Derek Hernquist's blog. It was part of his 2011 goals, #7: "Use models not to predict, but to create a range of possible outcomes for which we can plan." It's a great quote and is a perfect way too sum up what I'm doing on this blog. Some studies are basically trading signals to me, so they are trying to predict.  But often a study can be valuable even though I take no direct action. A did one about 2 weeks ago anticipating an increase in volatility. I took no volatility-related trades (i.e. VXX) , but it was valuable to me because it gave me potential scenarios for what could happen. There were a range of outcomes for which I created a mental plan. I'd rather plan for something and have it not come to fruition, then be completely caught off guard with no plan. Last week, I was ready for more volatility in individual stocks, and I managed my positions with that in mind.  I primarily buy pullbacks, so I planned to adjust entries (if need be) based on the idea that some stocks may pull back further than normal ('normal' being the past 2 months).  I'm not sure if that's a flawed conclusion, but that's what I came to. I also had it in my head, 'volatility should be rising, earnings season starts; I'm expecting some whipsaws.' Even if there were no whipsaws, at least I was ready for them.

Information is at the cornerstone of trading: access to it, understanding it, then utilizing it. There is so much out there (Twitter, StockTwits, blogs, CNBC) that it can be difficult to wrap your head around all of it. Yes, sifting through all the data can be an arduous task, but it is necessary and you have to practice at it. The speed and efficiency at which you process information only improves with experience. You have to keep studying to market on a daily, repetitive basis, and eventually you will turn the corner. We've chosen to be traders, possibly the most challenging and competitive career in the world, but one of the most rewarding and lucrative. I may be stating the obvious here: trading is not easy. We're almost f'd before we even start. It's a game where cheating is commonplace and the rules change every day. By learning to properly filter and process information, I feel like I can sort of play with the big boys. I can get a dog in the hunt. Running backtests allows me to develop quality trading plans that will help me maintain longevity in this business. Hopefully, many of you agree with that sentiment and are willing to share certain information that will benefit the masses without sacrificing your own trading performance or devaluing your hard work.

Good trading out there.


B7 said...


I really like your blog and I found it through stockbee.

I wanted to send you an email to discuss a partnership, but I didn't find your email. Can you send me an email?



Chris said...

simplequant at gmail dot com

Post a Comment