Gambling vs Probability Mindset
Weekly Plan 12.10.23
Hey guy-
Welcome to another installment of my personal journal and blog where I share my personal opinions on a variety of things going on with the world all around us.
Let me kick the week off with by sharing my recent thoughts on something I call “trading mindset” versus an “owner mindset”.
When I say trading what I mean is exploiting short term price movements. When I say investing or ownership, it is often multi month or multi year hold in several cases. In investing, I am not concerned about day to day price action. The decision is based on value rather than price.
In trading, I devote all of my energy and then some more to day to day price action. It is all about price. Personally, I do not know about you, but my philosophy is that I am ONLY interested in certain prices. And I reject all other prices. This is in contrast with traditional tech analysis where all prices are considered the same.
Let us take an example of 4560 on Friday’s session.
This is the December emini contract. BTW I am soon about to rollover and will send an email when I do. I have not yet as I need to update my levels.
The market is trading only a few hours ago near 4600. There is a certain price action dynamic going on, with the added mix of NFP about to come into play in a few hours or so.
At this point of time, I am really not interested in what is going on at 4600 but I am more interested in what is about to go down at 4560 in a few hours.
So, I already know my price of interest is 4560, in that given moment of time. I know this even before the market has opened and I have shared with subscribers here in the Substack.
That given moment of time represents the sum total of every force acting on the system- news, macro, technical analysis, opinions, sentiment, you name it. It is the sum total of all the factors that I am aware of minus anything out of the blue that can hit at any second. We don’t worry about it as we can’t do anything about it anyways.
Armed with this info, I just wait for 4560.
Now a few hours later we do get to 4560. If my original context is still intact, I can make a trade here once the market gets here. If I feel the original context is invalid, I can refuse to do anything. There is true freedom to be able to say no.
Now some may ask, why not do something when it is trading at 4600?
The simple answer is because I have no idea what is gonna happen at 4600! But I may have a very good idea of what I wanna do when it gets to 4560, as based on order flow , I am expecting something to happen at 4560.
I feel 4560 is a more probabilistic level than 4600, as far as I am concerned. This is often the case for level 2 and pit traders. For someone who is strictly from an indicator and chart background, this may not be completely clear. For indicator traders all prices are created the same. There is no difference between prices. Makes sense?
Let us say I do make a trade and I buy 4560. Now what?
Mind you my original context or analysis or whatever you want to say, told me that 4560 is a good level for a long. But what does that really mean?
It means that I am expecting a bunch of other traders to think this same way and I am counting on them to also buy 4560. If they buy also, that means we can see some sort of sponsorship or support at 4560, again in that moment of time. Now buying part is easy. The harder part is to find out if there is sponsorship by other traders at this level or not.
How to know that? I personally don’t overthink it. If we trade below 4560 by 10-15 points, then I know I have been wrong or other traders did not show up. Either way I am wrong. This is again my personal thinking and style. I do not sit there when the market is now trading below 4500 to realize I was wrong at 4560. I also do not like to see the market spend a lot of time at 4560 as more inventory there is, the higher the chance it is the seller volume rather buyers. I want to see a strong rejection at 4560, not acceptance.
Based on multi year, historic observations, you can determine the average size of a typical S&P500 intraday zipper. Is is 20-30 points? Now way! In the intraday time frames, as far as I know, I do not know any one personally who is sitting there and taking a heat of 20-30 points on any one idea or level. If you know some one I will be happy to talk about them.
I have a strong personal belief that almost anyone can do well intraday but most will not due to one reason- they will not be able to learn to take a loss. Once you learn to take a loss, the rest of the stuff is easy. But this one thing is psychologically impossible for most of us. In general, the more insecure we are mentally, the harder it is for us to accept a loss. Let me know if you agree or you think being insecure is an attractive quality?
For some of you these are very alien concepts as you freshly come from a chart based framework. Which is ok, I have a ton of educational content to help you get more conversant with order flow and tape based methods. Subscribe now for brand new content almost every week.
If you do NOT want to know about levels like 4560 and GME at 2 dollars then fine, do not subscribe to me!
We saw this dynamic play out again when I called high of the day and then again when I called buyers to come in at 4580, late in the session. In general higher the volatility, higher the number of levels I can come up with. Lower the volatility, lower the number of levels and hence setups.
To sum it up:
At any point during the day, I have levels in mind where I am interested to do something. This something can be buying the dip, selling the break of support, buying the break of resistance, doing nothing, getting out for a loss etc
Once I have identified a level and what I WANT to do with it, I will not linger when it is broken against my primary belief. So if I am bullish at 4560 and we are now at 4530 ten minutes later, I am not a bull any more. Or lemme rephrase it, I may still be bull but I am not in 4560 long any more, as an example. I am now searching for that next level.
Again some of these concepts for someone who has been doing it for 10 years or so are very clear. For someone who is super new to this, may be started during the 2020, these are alien concepts and can take time to grasp. New traders want to perfect their entry and give on thought to when they will exit. Experienced traders want to perfect their exit and entry is less important or not really important at all.
This is how I used to think too when I started out. When I was brand new, I used to think at 4600, “ohh if only someone could tell me we are going to 5000!” or “ohh I wish we now go to 4000!”.
There is nothing wrong with thinking that way, you are entitled to think that way, but it is frustrating to see your wishes not come true in context of active trading. This sort of thinking is hit and miss. It is the true gambling mindset. It is the “lotto” mindset.
The trading mindset is instead reliant on probabilities, it is based on finding levels which are also recognized by smart money. We saw smart money at play on Friday, when I shared those 3 levels intraday with my paid subscribers at low of day as well as high of day. In general, smart money does not do lotto. Lower the probability of a level hitting, lower the engagement from smart money.
Do you want to operate under the shadows of smart money or remain in Lala land fantasies ? Choice should be clear.
Join me as I improve my probabilistic mindset for the collective trading consciousness. FYI there are going to be major pricing changes in next year as I restructure this publication into two (one for newsletter and one for real time chat). Existing subs will probably have little to no impact as they get grandfathered in at $39! I think due to market conditions next year, there will be fewer folks active in markets than now. Due to this reason, I want to increase the premium to get in and raise the bar, expecting that those who are still active next year will tend to be more experienced and serious.
Levels for next week
This is a nice segue for levels for this week.
This is the dog days of 2023 with may be about 7-8 good trading sessions now left this month and this year. Due to the recent range in the emini S&P500, I am freaking out because I am really not seeing a lot on the tape as far as set ups go!
It will be far easier to go on TV and shout S&P500 5200! But that I feel is perhaps without substance and lacks robust analysis.
This is not to be confused with that I can not be bullish here because the market has come up quite a bit. In fact I have no problem with remaining bullish even after a nice run up.
This is exactly what I did at 4300 after that 200 run up from 4130 level. So I can be bullish when price moves up significantly and remain bearish when price moves down but there can be factors like I am seeing now which makes it harder to be either strongly bullish or strongly bearish.
So what to do?
The best thing is to shut down your machines and head out to the vacation. So that is what I am gonna do. See you in January! Bye.
But I do want to share a few thoughts about the CPI and the FOMC next week…
With this Friday’s close, I think the market is expecting a soft CPI and some sort of tangible action from the FED on Wednesday.
While I agree on the first part, I do not think the FED will do anything on Wednesday and I think the FED funds rate will stay at 5.5%.
Look folks have short memory, but only a few months ago, the market expectation was to see FED funds rate around 3% by year end. Like now!
Yet here we are at almost 6%. So, either the FED is making a mistake or is it scared of something. May be inflation running up again. Either way, I think it is sowing seeds of something major breaking in the system. If I was a guessing man, I think what will happen is a credit event. In simple terms, the credit will freeze. Can not find loans.
Only year and a half ago you had 1-2% interest rates on big ticket items, cars for instance. And now it is 8-10%. This is not sustainable and I think it will break apart soon. I think it can break sometime this next year.
But for now let us calm down and dial back to the weekly levels..
With this backdrop, my main level this week is going to be 4630.
Scenario 1: I expect personally to run into 4630 area and that could prove resistance for a move back down below 4584.
At time of this post we last traded around 4610. In general, the session for last 3 weeks or so has been a bracketing session rather than trending. The longer term bears will like to see more of that and that means to not start carving out new closes here at 4610 and above. I think this market could have been a lot higher, on backs off the likes of AAPL, had the Dollar not been so strong. This despite the FX intervention by the BOJ, weakening the Dollar quite a bit against the Yen. So, I think there is merit to the DXY strength and I think it is an evolving situation. I feel if and once the Dollar starts pushing higher above 105, it will bring some headwinds for the SPX bulls.
The main thesis I am leaning against for this week is that the FOMC on Wednesday could disappoint some of the recently minted bulls here so close to 4600. I do not see a rate cut at all, I see 5.5% FED Funds rate at end of the day, however, most of the bulls are hoping for a shift in the language that indicates upcoming rate cuts from the FED on Wednesday.
I have absolutely no reason to believe that the FED will change its stance, atleast on Wednesday. Employment is quite strong. Financial conditions have loosened quite a bit in recent weeks with massive rallies in bonds. I will be extremely surprised if the FED mentions rate cuts on Wednesday’s notes.
Look the thing with FED is, that in my experience, the FED is not very reliable longer term signal to rely on. If you want to look at a very recent example, the S&P500 was trading at 4800 on January 3, 2022 because the FED said it was “not even thinking about thinking about raising rates”. Yet, only 6 months later, it would have shed 25% of its value. So take everything this FED says with a grain of salt. I see them as a reacting creature rather than a predictive one. They also are reacting to short term signals like the rest of us. No one of any import now a days is doing any long term planning, atleast as far as I know no such institute is in the US.
Other scenarios could be shared with paid subscribers during the week with chat or otherwise. So like, share and subscribe to help me share these levels in future.
Let us now talk about a few other things I like on my radar.
This is the section where I usually share my thoughts on some other long term themes and swing time frame themes outside of day to day or weekly S&P500 auction. The level of conviction as well the number of ideas I share under this section is a function of where the general market is and how much clarity I have on the general market itself.
Most of the NYSE stocks are very correlated to the main index itself. So even if you find a great idea, it could still take some heat, if the general index begins selling off. In my experience, these type of names, do the best when the general market is also near some sort of decent support. That then becomes a tailwind.
This is the section where I share my thoughts on names like MARA at 3 which is 17 now, or SNAP at 8 which is 15 now, LULU at 350, or PLUG near 3, or TLT at 80 which is pushing 96 now. These are but a few examples of last weeks or so. There are probably 20 such examples I can go over in last 2-3 months, like AMD at 90, but subscribers can read in archives rather than me repeat myself.