I've been receiving good mentorship lately and it's really opened my eyes to how to make the best trades. Good trades all have some key elements.
1) Context
Context is the overall "picture" or "story" of the stock. Why are we making the trade?
It starts with ideas. The idea could come from anything - something fundamental about the company, a news report or catalyst, explosive earnings growth, projected bankruptcy. It could also be a statistical edge (e.g., wide range days are likely to put in a reversal the next day).
Some of these may go against each other, which makes the contextual bias not as strong in a given direction and can lead to choppy price action. You should know at what time frame these ideas or drivers of stock price will act on and unfold.
The context gives you an overall bias. Long or short? The context can also give you a clue about price targets or a time frame. Companies on the verge of bankruptcy can be terminal shorts and a good place to make a 90-100% return if you can hold that long.
2) Conviction
Conviction can dictate your position size. Position size is related to how much room you give for risk, but it is also related to conviction. You should be taking BIGGER size on trades with more conviction rather than risking equal amounts on all trades. This was a mistake I was making before.
Conviction comes from the context. When the context is screaming in a particular direction, that gives you the conviction needed to size up and hold.
This is where the information war aspect of trading comes in. The more information you go through, interpret, and understand, the better you will be able to evaluate context and build conviction.
You don't need a ton of conviction to make a trade... but your size should be smaller.
3) Confirming Price Action
After you have a context, you should wait for the market to confirm your thoughts. Ideally the market gives you a recognizeable price pattern or setup for entry.
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