The case for ultra-selectivity

Discussion in 'Trading' started by Ghost of Cutten, Apr 22, 2012.

  1. Think of all the good trades you ever made. Take the top 10 or 20% of them. Think of every factor that makes a trade good, and consider those rare trades that had 80%+ of positive factors. Chances are, if you can trade reasonably well, those elite trades kicked arse (or ass, since this is mostly a US message board).

    So, what about just being extremely selective with trades? Wait for the real 'fat pitch' setups, where almost everything is in favour? When I think back over my trading, each year there were maybe 3-5 truly great setups, but I did maybe 30-50 trades overall. The top 3-5 had great hit rates and payoffs...a usual record in one year would be 2/5 being huge winners, another 2/5 being solid winners, and 1 being breakeven or a small loser. The other few dozen would be maybe marginally profitable, or moderately profitable if I was lucky.

    What's more, the really great setups had far less risk. A great example is Apple in the last 3 years. 2009, 2010, 2011, this stock just outperformed the market on the way up, during flat periods, and in bearish periods. It's only recently that it started acting shitty. That whole 3 year period, it was cheaper than the market, growing much faster, much better balance sheet and management and products, a real no brainer.

    Other trades - shorting silver in spring 2011, going long bunds short BTPs (or Greek bonds) in 2010 and 2011, shorting Yen round about now, going long BP during the peak panic in 2010, and so on.

    So, the question is - why not just be super selective? Take the best 5-6 trades each year and forget the test. Or at the very least, only take a trade if it has a seriously good chance of being a 'trade of the year' candidate.

    Any thoughts? I know the system traders will (of necessity) disagree, but for us discretionary guys, shouldn't we be about 5-10 times more selective and only take the very best setups?
  2. That's pretty much what I do.
  3. yes, I think about that all the time. When I am flat, I spend a lot of time in my paper account. Usually trying to design some system that will turn the market into my own personal ATM.

    After a while you see what is working and what is not working, and what will probably work becomes fairly obvious. Then I switch over to my real money account and put it on, and take it off after it works.

    And then I go back to paper and try to figure out how to do that all the time.
  4. d08


    Might be obvious but how do you know in advance what the super trades are? You are benefiting from hindsight right now so it seems crystal clear. What if Apple had lost a big lawsuit? What if there was a leadership struggle leaving the company derelict?
  5. there's a very good nature documentary about the foxes of Tibet. Contrary to what many hippies think about Tibetens, they live on almost a 100% carnivorous diet. The main thing being rabbit. Over the centuries they have devised many ways to hunt rabbit, including kites and trained birds.

    The one thing that messes them up is the fox. So both the humans and the fox track a rabbit and try to figure out the best way to kill it so they can eat.

    They have these pictures of a fox with his ribs showing through because it has been so long since he has killed and eaten a rabbit. But as much as he likes to eat, he likes staying alive even more.

    So this fox will watch the hunting ground, but if there is even one thing that doesn't look right to him he will back off and let the humans kill the rabbit.

    I guess he figures "I can go longer without eating than they can."
  6. I didn't start this thread. Someone must have been inspired by my original post.
  7. Daal


    The argument against ultra-selectivity would be a statistical one. If a trader can find 3-5 excellent trades a year its likely he could find several multiples of that in good trades a year

    A trader would have to have a very good reason to pass up smaller edges, maybe a time constraint of some kind. Otherwise this would be like playing poker but refusing to steal the blinds with good but not great hands when you know its profitable
  8. A system traders' viewpoint ...
    #10     Apr 23, 2012