Pro-Trader Systematic Process: Trade Ideas and Market Definition

Trade Idea Generation Process

  • A trade idea is defined by four components:
    • Fundamentals
    • Timing
    • Catalysts
    • Trade Structure
  • All four components are required for a trade idea to be valid.
  • The relevant time horizon for trade ideas is 20 to 60 days.

Risk Management

  • Preventative Risk Management: Measures taken before a position becomes live.
  • Reactive Risk Management: Actions taken in response to the movement of the stock price (winners or losers).

Trader Metrics

  • After positions are closed, they become part of the trader's track record and are analyzed using trader metrics.

ITPM Principles

  • Self-sustainability
  • Work ethic
  • Free information
  • Working smart, not hard

Establishing Market Type

Importance of Perspective

  • Defining the market type (bull or bear) is crucial for professional traders.
  • This definition sets the overall tone and affects the trader's approach.
  • It is essential to continually seek perspective.

Perspective Components

  • Historical perspective (where we've been)
  • Current perspective (where we are now)
  • Expected outcome (where we could be going)

Stacking the Odds

  • Day trading in mega-cap equities has approximately a 50/50 chance of success.
  • To improve the odds, traders need to understand the bigger picture and have perspective.

Key Questions for Traders

  1. Where has the market come from?
  2. Where is the market today?
  3. Where is the market going?
  4. What does it all mean (perspective)?

Portfolio Biases

  • Strong market performance: Long bias
  • Weak market performance: Short bias
  • Flat market performance: Long/short or market neutral bias

Defining Bull and Bear Markets

Bear Market

  • A bear market is defined as a 20\% fall in an index from its high.

Bull Market

  • A bull market is defined as a rise in the index above the previous bear market level.
  • Media Definition: a 20\% rise from its low. (Not the professional definition)

Examples from Stock Market History

Global Financial Crisis (2008-2009)

  • SPX high (10/11/2007): 1576.09
  • Bear market level (20% down): 1260.87
  • Bear market level Reached (07/07/2008): 1252.31
  • SPX low (03/06/2009): 666.79
  • Bull market level Reached (01/03/2011): 1271.87

COVID Sell-Off (2020)

  • SPX high (02/19/2020): 3393.52
  • Bear market level (20% down): 2714.82
  • Bear market level Reached (03/12/2020): 2480.64
  • Bull market level Reached (04/08/2020): 2749.98

Further Analysis

  • Review indices such as NASDAQ, Dow Jones, EuroStoxx, FTSE, DAX, and others to understand their historical performance during bull and bear markets.
  • Analyze the provided spreadsheet with examples for various indices.

Predicting Market Movements

  • The next step is to learn how to predict transitions between bull and bear markets and how to build portfolios to take advantage of these situations.
  • The starting point for this analysis is Gross Domestic Product (GDP).