Our trading mastermind has been developing a technique that we call trading narratives in order to develop low risk trading ideas that share the common feature of the acronym SLBG, or “small loss big gain”.
We chose the word “narrative” to capture the idea that we have been developing story lines for our favorite trading targets. We found ourselves becoming interested in stocks and ETF’s for particular reasons based on the market condition.
As we framed our trades and the results came in, many times we felt like we were beginning to understand the recent behavior of the stock in a special way. We began to feel that our understanding was giving us an edge in the development of additional trades that would offer themselves as the story of the stock or ETF would unfold in the subsequent days.
Then there would come a day when the story seemed to be over and the logical thread that had tied together the sequence of trades over the last couple weeks had come to an end while the stock or that ETF would muddle around in a congestion area and show no directional bias. We started calling this the “end of the story”.
As we became more comfortable with this technique, we started looking for ways to frame a trade based on a scenario that seemed to have some logical justification for being true.
Our practice then would be to frame the trade in such a way that if the hypothesis were proven true we could expect to achieve outsized returns compared to the market while at the same time enduring only a small loss if we saw a price that would invalidate the main storyline.
From social science we borrowed the idea of a narrative, which is a socially constructed version of reality generated by people and their pattern matching brains and the powerful artifact of their language. Some schools of sociology consider all of our reality to be socially constructed in this way. We don’t really have a position on that one way or the other, we’re just trying to find low risk ideas that reward us handsomely for taking small risks.
We have been framing narratives around federal reserve days, days of the week, reactions to news, rumors of government intervention, and finding our trading targets in both ETF’s and large-cap stocks that will react the strongest if our scenarios are true.
Our practice of trading narratives has become an integral part of our trading mastermind which adds value to our trades on a daily basis. The story lines are grounded in sound trading strategies and are combined with the power of our imagination and trading techniques.