Technical analysis | Practical trading

How & why I label my investments from easy to hard

March 21 2022

Weighing all my investments on a difficulty spectrum grants me a clearer mind. Allow me to explain this by presenting my framework and giving you real-life examples.



This article is a blog-style article and is void of investment advice.

Introduction

  Before I daytrade, I prepare my watchlist and will do my fundamental analysis for the underlying companies. But, whén I daytrade, I tend to solely use technical analysis. In other words, I look at the graph and seek out good entry points for making profit.

  From my 3 years of daytrading, I learned that I should differentiate between three types of entry points: easy, medium and hard. This article, then, is dedicated to introducing you to these labels of mine:

  • I consider an easy trade to be a stock that is likely to rebounce upward: it is currently sitting at a cheap price point and has no strong, fundamental reason to be.
  • A medium trade is a stock that already rose quite a bit in price, but I still see some upside in it.
  • A hard trade includes an iffy entry-point from a technical analysis standpoint. Yet, I may still buy it because I, for instance, strongly belief in this stock and don't want to miss out on further gains.

  Let me go through these three categories and provide you with some real-life examples to visually explain what I mean. In addition, I enjoy to add some footnotes to these explanations, so that I can explain how I make use of this labeling in my deliberations and how it interacts with my other forms of analyses.

Easy trade

  For me to deem something an easy trade, there have to be two components.

  The first component is that I am positive about the asset based on fundamental analysis. It's even better when that fundamental analysis has a strong component of 'favorable winds'. Here, let me give you an example: in 2020 I realized that I absolutely loved the way that Nintendo made their beautiful Nintendo Switch product. As a gamer, I knew that the market would accept this product with open arms. An additional benefit is that I noticed how Nintendo's main staple Pokémon was clearly rising in popularity.

  The Second component of an easy trade is that it comes with a good price point. This could mean that the stock graph remained neutral, while the fundamentals of the company have increased (or that I picked up on them). But, it could also mean that a fundamentally strong stock dipped for a while, and that I think it has now bottomed out (this is intertwined with considerations like the amount of time that it dipped, the likely market support of the current price and the way that competing stocks are doing).

  Oftentimes, when these two components align, I will feel confident about buying a stock. These easy trades have made me the most amount of profit, but still allowed me to retain a peace of mind.

  During some periods, I find that these easy trades become hard to find: when the market has been doing too well for too long, it tends to become saturated. A stellar example of an easy trade is JD.com on March 14-15. I deemed the price point to be too low and I was unable to play devil's advocate and explain why, even given the concurrent news, the stock had almost lost half its value. You can look at this graph to visualise my example:

The graph does not include today's fluctations. That is why you see today's huge correction of JD.com in red (-7,73%)

Medium Trade

  I deem a medium trade to be consistent of either one of the above two components. In other words, a medium trade either has great fundamentals or it has a really nice price point.

  Today, on Monday 21-03-22, I heavily betted on apple during the opening hour of the Nasdaq (and yes, I am still watching it while writing this article). If you look at this graph, it isn't quite a 'cheap' stock from a technical analysis standpoint.

The timeframe of this graph is 6 months.

  Based on this past graph movement, I deemed that there was a high chance that the recent rise would consolidate today and make apple stock decline to about 162$ from its 164$ starting point. Speaking from retrospect, this consolidation did actually occur in the first two hours of market open. As you can see in the next graph, the price of apple stock went down to 163$ for a moment.

Hard Trade

  Hard trades include assets that have neither fundamental positives nor good-to-medium price points based on my technical analysis. However, hard trades are still trades that I conduct from time to time. I don't really know why I do them to be frank.

   I usually make hard trades when trading crypto: my mental threshold of investing in these assets is much lower than for stock market trades. But, perhaps I should be harder on myself and abstain from such 'whatever trading', because it hurts my profitability. This example from three days ago shows an example of a hard trade that I actually made:

  • I bought at 394 USDT, when BNB (the native crypto token of the Binance trading platform) had risen quite strongly already. But, somehow I just had a good feeling about BNB and I admit I kind of had that itch to invest more. ~ this investment itch partly comes from my memory of the times that I missed out on 'profits on top of profits' (when you'd think a stock would stop rising): days when the market is as green as a Bavarian meadow.
  • I should probably drop all the hard trades that I do. While they do turn out profitable on occasion, my hard trades are just dumb 'investment-itch-related' decisions half of the time. In the future, I plan to stay away from hard trades and tell myself that 'not investing my dormant cash is always an option too'.
  • I came to realize that humans, like me (^^), really love to feel agency. When they are behind the driving wheel, playing the game instead of watching it or typing in twitch chat: they want to interconnect with the world by saying "hey here I am" or "wow I did something that has an effect on the world". My inclination towards wanting to feel that I have agency in my life (that I can do something, especially something that was forbidden before) is something very natural. But still, I should realize that it can stand in the way of trading profitably. There is a time to be natural and human outside of market hours, but I try to be optimally profitable yet safe during said market hours.

Conclusion

  The benefit of labeling each of my entries into the market as an 'easy', 'medium' or 'hard' trade is that it enables me to intertwine the labels with my strategy. When I feel bad on a particular day, I may promise myself that I will only engage in 'easy trades'. When I realize that most of my recent 'hard trades' lost me money I can promise myself to stay away from hard trades completely.

  This conscious knowledge of what I am doing has granted me a lot of clarity in my mind. If it weren't for this framework I bet I would feel way more chaotic about my trades.

   In sum, I find it handy to have learned to label entry points from 'easy' to 'hard'. It gives me a peace of mind, allows me to set rules for myself, enables me to build upon a framework with even more analysis. It also helps to prepare me for variables such as global developments and 'bad news'.