Farming

Michelle B on Trader Mike writes about finding a niche - I put it differently - I say you need to look at your trading as if you were farming. You put in a couple of crops and watch them grow. A farmer doesn't grow every possible vegetable in the world, he grows what his particular land will carry and what he knows about. You really can't go from tomatoes to potatoes you know, at least not in bulk. First place even though tomatoes will grow just about anywhere you really do need special soil for potatoes - sandy with very little clay is about right. Otherwise you'll be growing marbles and don't worry if you don't know why - it really doesn't matter. Point is you need to specialize not only in the type of trades you will take but what you will trade in. You need to find your comfort zone.

I only like to play on the long side of the market - first I know that method and second the bias of the market is long. While I could adapt my methods to play the short side my head nor heart would be in it and I would fail. It would be awful to be making money on the long side and giving it away short. Also I have enough trouble finding stocks to take a position in on the long side - I can't imagine what it might be like going short.

For catching potential longs I developed a couple of screens that look for gap downs and gap ups and what I found after several weeks is that the same stocks were always coming up on my screens. Apparently stocks have a personality and some of them can't go up unless they first dip down and some can't go up unless they gap up to start then dip down. So after awhile I just made a list of the common elements and what some would call a watch list I call my "farm".

I play stocks from that list more than any others because I know how they react in various market conditions. Of course it isn't the stock that is reacting but the traders of that stock who are reacting and I know their moves. I know when a certain candlestick formation sets up what will happen next with a high probability of success. So just like a farmer who knows how much a given field will yield given a certain mix of fertilizer and water I know how my fields will behave given a certain mix of price and volume.

And I find that both comfortable and profitable. The best part of this is when a field is played out I know that too and can then look for a new crop to farm.