Taking The Easy Money Versus The Hard Money

A write up on "No Man's Land"

The easiest way to boost your profits is to avoid your most obvious losses.

By far, the biggest mistake I see traders make is overtrading a stock AFTER the initial trend phase is done. So often, traders catch a nice drive but then stay around due to the mental bias of having just made money on that name. The edge and the EV have totally diminished but you go back in for more action.

I know this because it is also one of my biggest problem patterns.

A trading experience from last week reinforced this truth. Here I was up a considerable amount of money in the morning session on some morning drives. Instead of locking in the trade when exhaustion signs emerged, I decided to hold a core position in the hope of a bigger move higher. Complacency and a bias got the better of me. I was pushing for an even bigger trend day and was blinded to the signals at the present moment.

The result was inevitable as I gave back almost all open winnings.

A solution to this problem is to introduce a principle coined by my friend Lance Breitstein: “No Man’s Land”. In this week’s newsletter, I want to expand on this powerful concept and how it can improve your trading odds dramatically.

The easy money is in the drive. The hard money is trying to re-enter the trend

No Man’s land is when a stock is trading in a range. Volatility contracts and a choppy pattern ensues.

The data from my trading is overwhelming that > 50% of churning and paper cuts occur when the stock is done making its trend and it needs time to consolidate.

As Lance makes clear, it isn’t that you will never make money trading in No Man’s Land. It isn’t that there aren’t possible opportunities. It means that the probability of a clean move is much lower. The likelihood of chopping yourself to pieces goes up. The easy money has been made as the market has become more informed.

The reality is that those beautiful, open-to-close, all-day trends are rare.

Below are idealised examples to better illustrate this point:

FLT 5mins 18/10/24

PLS 5mins 11/9/24

IGO 5mins 11/9/24

In these examples, you can see that easy money is made WITH the trend and going WITH the early flow. The patterns become choppy and more random as this early trend exhausts itself. Some observers will highlight VWAP as a natural target point for a pullback but the truth is that these mock-ups are highly idealised. More often than not, VWAP is totally random (trust me I have seen the data).

Behold the SEK intraday chart on Earnings day:

The solution to avoiding this tricky No Man’s zone is to better define the characteristics.

Create rules for no man’s land

The truth is you can make a lot of money by simply following the trend and cutting losers short. Just ask Crypto bros.

To implement No Man’s Land into your trading, you need to identify signs that a stock might be finished trending. These could include:

• A sharp turn bar ending the prior trend

• A price extension which now needs time to consolidate

• A move below your favourite moving average

• A volume capitulation

• A time of day

When these are in place, you can now better define that the stock is entering into a pullback or range phase. Some characteristics could include:

• Volume dying off

• A deep pullback into VWAP

• Price back into the day range

• Bands contracting

There is no right answer here and it will be dependent on your timeframe. Rip through examples and formulate rules. Collect data to conclude what works or doesn’t work for these areas. Practice identifying in real-time when a stock has entered back into no-mans land.

From here, create rules to minimise the damage in the areas such as less size, tighter stops, or a max number of attempts to fight for price back into the trend.

Below is an extract from my report card this week to illustrate how No Man’s land played out, what I learned, and solutions going forth to rectify.

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17/10/24

P/L:  +$26k ($15k off highs from core holds and 1 overtrade)