Lecture on Trading Patterns and Strategies

Introduction

• Discussion on trading patterns involving moving averages.
• Focus on a specific pattern: wedge pattern between the 20-period moving average and the 200-period moving average.

Wedge Pattern

• 200-period Moving Average: Typically flattish, acts as resistance.
• 20-period Moving Average: Rising, narrowing the gap with the 200-period, depicting a wedge-like pattern.
• Stock trapped between these two averages behaves like a ping-pong ball.
  • Indicates potential for the 20-period MA to eventually overcome the 200-period MA.

Trading Dynamics

• Resistance and Support:
  • 200-period MA as resistance trying to knock the stock down.
  • 20-period MA providing rising support to the stock.
• Power Dynamics:
  • The 20-period moving average is likely to win as it continuously rises, gaining strength.
  • The closer the stock breaks to the wedge's apex, the stronger the move.
• Example: Tesla's movements illustrate these principles.

Elephant Bars

• Elephant Bar: A powerful bar in trading, even more powerful when clearing previous data.
  • Clearing Elephant Bar: No data to the left, akin to the tallest building, making it very powerful.
• Hierarchy of Power:
  • Elephant Bar
  • Elephant Bar Plus
  • Elephant Bar Plus Clearing
  • Elephant Bar Plus Clearing off the 200-period MA (extremely powerful)
  • Elephant Bar Plus Clearing with a wedge (triples power)

Strategy: Weight of the Evidence

• A method to assess the strength of a trade by weighing evidence.
• Assign size to trades based on scenario weight (e.g., 1-lot, 2-lot, 3-lot scenarios).
• Avoid making decisions based on emotion; systematize trade sizes.

Sizing and Risk Management

• Assign predetermined lot sizes based on trade scenarios.
  • Quintessential Trade: 2 lots initially, add with 1 lot.
  • Kamikaze Play: High conviction play, possible due to small risk size.
• Risk Management: Ensures maximum loss per trade is controlled.
  • Kamikaze allows high leverage on minimal risk.
• Example of the "Acorn Play": Tiny initial risk allows for potential massive gains.

Student Example Analysis

• Lumen's trade example: Identified and executed a powerful trade using the discussed principles.
  • Entered above a clearing elephant bar.
  • Profits taken intelligently, but could improve by adhering to bar-by-bar stops.
• Discussion on maximizing efficiency in exits, considering large position sizes.

Conclusion

• Importance of systematizing entry and exit strategies.
• Encouragement to weigh evidence and assign sizes before trading.
• Continuation of learning to grow from "baby steps" to larger trading strategies with higher stakes.