How to Develop a Winning Strategy That Beats the Market

Five Highlights From Chapter 6 of Psychological Analysis

Happy Easter!

I usually get anxious when the markets are closed for holidays, but I was actually glad to have a break this week since Good Friday is basically the Super Bowl of fried fish for the restaurant industry. 

In this week’s chapter from Psychological Analysis, author Adam Sarhan left behind the basics and dove into some more advanced ideas. I couldn’t help feeling that this chapter was exactly what I needed, and I’m excited to discuss it with you. 

Anticipate Breakouts Before They Happen

Smart money traders these days have to anticipate breakouts before they happen and take a position in a stock that is already in an uptrend and on the move.

Sarhan throws us a curveball in this week’s chapter when he explains that smart money traders need to find ways to get into a position before the obvious pivot point. This reminded me of the chapter on pocket pivots in Trade Like an O’Neil Discipleand a webinar I watched earlier this year on buying pullbacks. 

Alternate entry points like buying as a stock builds the right side of a base or pulls back to a key moving average can offer a significant advantage to strictly buying breakouts, provided you manage your risk. When they work, these alternate entries can provide an immediate cushion for the position. 

Patient With Your Winners

There’s an old Wall Street adage that says, ‘You want to be patient with your winners and impatient with your losers.’

Anyone who has read a decent amount of trading books has been constantly reminded that it’s important to cut your losses and let your winners run, but the way this was worded a little differently had an impact on me. 

It’s easy to say that you want to cut your losses and let your profits run when talking about trades you hope to make one day. It’s much harder to do in the real world.

This phrasing using the words “patient” and “impatient” has a much stronger connection to the feelings of fear and greed you will likely be feeling when you have to make the buy/sell decisions in real time. 

Recognizing Opportunities On My Own

I didn’t start having success until I started recognizing opportunities on my own and working on a set of rules that I developed - rules born out of the collective wisdom of the investors I had researched and modified based on my own market experience.

Sarhan explains that he didn’t find trading success until he combined the wisdom of all the great traders he studied and developed a unique approach that worked for him. This was a lightbulb moment for me this week. 

I talked in the intro last week about how frustrated I’ve been. After finishing this week’s reading, I realized that I need my own unique approach to the markets. 

That means that it’s ok for me to focus on the very best stocks and buy them early. 

It also means that there isn’t anything wrong with picking up the stocks that I miss as they come back down to their 21-day EMA. 

It’s also perfectly reasonable for me to put some of my account into longer-term ETF positions that are working right now instead of sitting on the sidelines, hoping that the market comes back soon. 

They Want to Blindly Follow

These people (hopefully, not you) want to be told what to do, and they want to blindly follow some “magical” system because it is “easier” than digging deep and doing the hard work needed to get ahead (which I call intellectual sit-ups). They jump from one “magical” “can’t lose” crazy idea or new system to the next. They lose year after year. Rinse, wash, repeat. They run on a hamster wheel for their entire adult life and end up either broke or paying out of pocket for a lot of “market tuition.”

Most people desperately want to be told what to do. They jump from one approach to the next, looking for someone to tell them what to buy and when to buy it, rather than bothering to learn how to think for themselves. Exploiting this fact is the path to developing an edge. 

I’ve always done an excellent job of avoiding the part about wanting a system to do the work for me, but I have been known to bounce around trying different strategies when things aren’t going well. It’s something I’m always watching out for. 

Dumb-Money Myth

There is a dumb-money myth that there is some award for working 60-70 hours a week. What do a billionaire and a drifter have in common? They both have 24 hours in a day. The billionaire invests their time and the drifter blacks out and spends it frivolously. 

I used to be the guy that believed that myth about working 60-70 hours a week. Working 100+ hours has never been all that difficult for me. I actually like it. 

However, I have learned over the past few months that there are different types of work that fill those hours. 

When it’s the kind of work that is investing in my future, those hours are probably worth the effort. But when I find myself wasting countless hours checking off boxes on a to-do list that doesn’t actually correlate to any version of long-term success, that means something needs to change. 

I’ve done a lot of work on this recently after reading From Strength to Strength by Arthur Brooks and Four Thousand Weeks by Oliver Burkeman. The progress has been enlightening, so here’s to investing that time in a way that matters. Let’s get to work. 

Have a fantastic and profitable week!

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