Trade Ideas Blog

The Zig-Zag Method for Trading Profitably and Maintaining an Edge Forever

Jul 31, 2008

I’ve never seen such an avalanche of ad campaigning for a single week of TV programming: it’s Shark Week on the Discovery Channel. If you’ve been to New York anytime over the last 4 weeks, you’ve been flooded with all forms of print ads everywhere. It’s so saturated that all the shows that tape in NYC can’t help to make mention of it during their small talk. So now America knows its Shark Week.

Am I watching any of this as a result?

No.

If I see everyone doing something, I get interested in doing something else – if everyone is zigging, it’s time to zag into another direction. I’ve recently been reminded of this and how it affects my trading.

Zig-Zag for a Trading Edge

Traders express frustration when a strategy used for a profitable length of time stops working. The worst cases are when traders keep trying to apply the strategy in the face of continued losses: the round peg in the square hole phenomenon. There is no one holy grail in trading or one silver bullet.

There’s a collection of them.

Knowing which one to use at the right time is the difference between making you or your broker richer.

Dr. Brett Steenbarger, an expert in the field of performance enhancement for traders, astutely observes:

“Even the best-researched mechanical trading systems degrade over time. For this reason, traders are continuously learning, unlearning, and relearning market patterns. Their survival crucially depends upon their ability to sustain states of enhanced learning.”

Source: Interpreting the Personality Questionnaire for Traders, 1/27/2007

Ways to Zig-Zag Your Trading

  1. If you can’t think of your own, borrow ideas from the thought-leaders you follow. Be just ahead of the pack but right after the early adopters. If you understand the concepts of a thought-leader quickly enough, you can put into practice key learnings and generate your own conclusions. With blogs and Twitter this is an easy tip. For example, I’m never far from the brain droppings of TraderMike, or Downtowntrader, or WallStreetWarrior, and for a multitude of reasons, Howard Lindzon.
  2. Live and trade in the previous cycle. Everyone seems to live and die on being up-to-date, in the now, and constantly on top of the latest pronouncements that it’s easy to forget what gems were said just a few months ago (let alone a year or a decade). What comes around, goes around – if you can reread and understand what was learned the last time, the chances are you’ll be ready when the ‘last time’ comes around again.
  3. Let’s get practical: Flip the Chart. It’s a simple and powerful concept borrowed from Charles Kirk and a great trading technique that we wrote about ‘the last time around’!
  4. Automate key strategies that begin under predefined market conditions or time periods. I can’t overemphasize the importance of keeping a log of every single trade you make. There are tools out there that make this easy, so there’s no excuse not to do it. (Try the backtesting tool, The OddsMaker by Trade-Ideas and/or the recordkeeping abilities of StockTickr which now offers it’s automatic trading journal in combination with Trade-Ideas’ automation via Interactive Brokers). For example, you discover that one strategy really only makes profitable trades in the afternoon. Another strategy works well only when the S&P is on an uptrend. Who can keep all these external variables in mind all at once? Automating under what conditions strategies trade and at what times removes the mistakes possible under manual trading. It’s accessible now to the active trader and moving through the first wave of early adopters. Years from now we’ll look back at the way people traded today in much the same way we now look back at the way people used to call their broker to make a trade: ancient.

Be strategic about the way you’ll employ these tactics for keeping your trading edge. It’s no use being an ‘also-ran’ to these thought leaders without coming up with your own conclusions. Tools like Trade-Ideas with The OddsMaker and certainly the Automated Trading Bot will keep you learning where the next step lies and will keep you aware when shifts in the market render one strategy less effective and another more so.

Note: Thanks to an outside the box source for the zig-zag concept.