Getting Creative: Generating New Ideas and Finding New Patterns
Tom Dante notes: stop moaning and start improving (part 4)
Often, you’ll have some idea of where you might be able to improve. That’s precisely why so many traders ask questions — quite possibly very good and specific questions — to other traders about what they should be looking for.
The trouble is that you need to figure out the answers for yourself, whether by looking at lots of charts, your journal or, ideally, both.
In part, this is because not everyone will find the same answer. More importantly, this is how you build conviction — a vital component for trading success. This was outlined very clearly in Qullamaggie’s Chat With Traders interview.
Furthermore, creativity and innovation are important components for successful trading, as highlighted by Stockbee:
This doesn’t mean that you have to reinvent the wheel, nor should you forego the basic principles of risk management and other trading best practices.
You don’t even need to come up with entirely new patterns. Simply coming up with a variation of an existing one, or picking up on some small, underappreciated detail that you’ve noticed to make a huge difference to the likelihood of a trade working can be enough to gain an edge.
So how can you develop a solid process for generating new ideas and testing things out? That’s what today’s stack is focusing on.
About today’s notes and this series
This is the fourth and final part of my Tom Dante notes — specifically on his “Stop Moaning and Start Improving Part 2” video.
If you missed the earlier parts, I recommend looking at those first, especially part 1, which explains why I’m writing about this video despite trading a completely different strategy to Tom. But to tell the short version: coming across this video marked a huge turning point in my trading journey.
Part 2 focused on the question of whether you should be actively managing your trades or not. Part 3 looked at ways of allocating risk (position sizing) more effectively.
Today, we’re looking at Tom’s process for gathering statistics and coming up with new patterns. As usual, where I think it useful, I also added my own insights.
Even more strongly than for the previous parts, I encourage you to watch the video for yourself. Quite a few of Tom’s stories I touch on in today’s notes are best heard from him directly — not just from an educational perspective, but also from an entertainment one.
Tom’s process
Tom’s high-level process is as follows:
Write down an idea of a statistic to gather.
Formulate an idea to test.
Start testing — i.e. collect the data and enter it into Excel.
Gather new ideas and re-test them to find an edge (particularly with respect to managing risk) when accounting for different variables.
Let’s delve into those steps in a bit more detail.
For step 1, Tom keeps a ‘book of bright ideas’ on his desk (see the screenshot above), in which he notes down ideas for statistics he wants to gather, based on something he’s read about or seen in the market.
For the follow-up steps, he gave an example from 28:37, where he wanted to buy USD/JPY, but it gapped up. That left him with the question whether to buy it at that moment, or to buy it after the gap closes. To be able to answer it, he needed to know the probability of that gap closing (step 2), so the next time he faced that scenario, he would know what to do — or rather, how to put the odds in his favour.
Similarly, in an example from 30:00, Tom looked at gaps in EUR/USD. First, he established whether all gaps fill (step 1). The answer is that only most gaps fill. With that in mind, he looked into how to profitably fade the gaps (step 2). For instance, what would happen if he entered when the market opened (going against the gap), setting his target at the gap close and his stop at the same size as the gap?
So he collected that data in Excel (step 3), then tested this with different stop sizes (including 0.5x the gap and 2x the gap) to see how this affected his strike rate (step 4). That information enabled him to figure out which stop size would give him the best expectancy on this mechanical strategy.
Applying this to breakouts
Quite a few of you are trend followers, trading non-mechanical strategies such as breakouts, where market environment really matters. I believe you can still use Tom’s broad process.
No matter how you trade, anyone can come up with ideas to test. As for the end result of step 3, that may look something like this breakout database put together by @kyletrades_. As you go through it, what patterns do you notice? How do the really big winners differ from the names that make only modest gains?
Or you may notice something simply from your journal or by watching the day-to-day price action. We’ll look at a few examples of this later. First, I want to get to the main takeaway — the one that applies no matter how you trade.
The key point
Tom says at 29:08:
“Good traders that have knowledge that you don’t have — it didn’t f**king just come to them. […] The fact that I know the statistics of an open drive in the Bund, or the fact that I know the probabilities of the Bund going up between 4 and 9 pm on month ends, or the fact that I know the statistics for the EUR/USD gap closing on a Sunday — I wasn’t born with this bloody knowledge! I’ve gone through hours and hours and hours and hours of working it out.
“So I get ideas, and I put them in [my notebook], and I test them at a later stage.”
Admittedly, this is a very different type of knowledge than the sorts of things that, for example, Qullamaggie shares with us.
But the key point is this: you’ve got to put the work in. You’ve got to do those deep dives. Otherwise, how will you acquire the knowledge to be able to stack the odds in your favour and excel in the markets?
Reading and watching high-quality educational materials will help you in your journey — mainly to teach you the basic principles and to inspire you.
But that in itself isn’t enough to enjoy a long and fruitful career in the markets. If it was, we’d all be on our yachts.
Looking at your MAE
Moving on to a concrete metric you can look at, the maximum adverse excursion (MAE, from 17:00) is one that definitely should be on your list. This is particularly true if you notice your winners hardly turning red at all.
But even if that isn’t a pattern you’ve noticed, I believe this is still something you should look at. For one, it’s very straightforward to calculate (I discussed how to in detail here). For another, no matter what you find, you can almost certainly learn something from it.
Most obviously, since the MAE is the % that your winners move against you before they turn into winners, it makes no sense to me to set a stop wider than your MAE. So if, for example, you regularly set 10% stops, but your winners never move more than 5% against you, that’s a very easy, quick way you can improve your bottom line.
On the other hand, if you find that you have a very wide MAE, this suggests that your entries could be better. So do something about them! Maybe you need to be more selective about your setups. Maybe it’s simply a case of needing to use limit or stop-limit orders. Perhaps you need to improve your situational awareness. Or maybe it’s something else entirely. Just come up with ideas to test by looking at your past trades.
An example from Tom
Tom mentioned at 19:02 that he personally looked into how he could improve his entries by going through his past trades — specifically, through screenshots of them — because he often saw his eventual winners turn red first.
In doing so, he found out that the market tends to gravitate towards the last high within a base before really breaking out and taking off. He illustrated this with the below screenshot (to which I added the letters):
Previously, Tom got into a trade as point A was taken out. In other words, he’d enter at point C.
But when he went through his past trades, he found that the market often gravitated back towards the last high (or low) before breaking out (or down) — so point B in the above screenshot. As such, he realised that point D was the better entry point.
As ever, don’t take someone else’s word for it, particularly if you trade a different market and time frame to Tom. Always verify things for yourself — it is the only way you can develop conviction.
Also bear in mind that it’s important to look at all your trades — i.e. your winners and your losers — to avoid bias as best you can.
What if you have a widely varying MAE?
Going back to the MAE more generally, if you find that you have a widely varying MAE, look into why that is. The better you can answer this, the better you understand your own trading and edge, and the more you can improve them.
What’s more, if you know what ‘normal’ looks like for you, you’ll also be able to tell when ‘the train is not on schedule’, as Mark Minervini likes to put it. If you know what should happen, you can quickly identify when something — whether the market or yourself — is off.
So, why might your MAE vary widely? Is it, for example:
Because of the strategy/setup you’re trading?
Due to the market environment at the time?
Related to the average daily/true range (ADR/ATR)?
I know many traders who look for high ADR stocks and allow themselves to set wide stops on those, but I doubt that they have all actually gone through their journal to check whether those wide stops were necessary for them. Honestly, it’s worth doing this. When I went through mine, I discovered that I had zero winners that moved more than 2% against me before turning into winners — a story I’ve told a few times now, e.g. here. And that was irrespective of ADR.
Study your journal!
For clarity: I’m not saying you should copy my rules, or that wide stops are bad. I’m saying that this is what worked for me, and that I only realised this by going through my journal.
Moreover, because I knew that’s what my hard numbers told me, I felt very confident about setting tight stops from that point on. I couldn’t have had such conviction based on someone else’s word, regardless of their track record.
So, seriously, go through your journal and verify things for yourself. The same applies to charts: you can’t just take someone else’s word for it — you have to study for yourself how stocks move.
Realistically, however, you’re going to need both. This is Tom’s experience (19:49):
“Every single thing that I do in my trading comes from the fact that I started with a basic premise, and then worked on it, from my journal, to improve it. […] With a situation like [the screenshot earlier] is why it’s quite important to have screenshots.”
Patterns among your losers
Speaking of the importance of combining screenshots with journal analysis, from 22:08, Tom pointed out that you can also look at your losing trades, and check whether they have anything in common in terms of their price action.
For example, if you buy breakouts on an hourly time frame — or, for that matter, on a daily time frame — and the breakout candle on the hourly closes below the pivot point, does that mean the breakout is likely going to fail?
For Tom, the answer is no. For me, on the daily time frame, the answer is yes. Then again, as I’ve said before, I trade differently to Tom. You need to find out your own truth.
As another example, Tom discovered his swing failure pattern (SFP) by going through a student’s journal. He discussed this from 34:45, and I think that if you’re a breakout trader, you should listen to what he discovered.
Learning from missed trades
I’m fudging a little by including this as a way of generating new ideas, but most people do miss trades — by which I mean setups that actually met your criteria, not just hypothetical situations that fell outside of your system/strategy anyway.
Tom suggests that if you missed trades because you weren’t aware that they were setting up — due to watching too many things at the same time, for example, or because it set up while you were asleep — you could set up an alert system with a group of people trading the same strategy as yourself to not miss anything.
I personally have been too restrictive with my scans in the past, which resulted in me missing trades. I accept that I’m never going to catch everything, but I at least want to make sure I’m aware of the strongest stocks and emerging themes.
To uncover what trades you may have missed as a momentum trader in US equities, this Stockbee video could offer a good place to start.
Fading others
The final example Tom gives is a pretty lengthy and entertaining story, which I think is best heard from him directly (from 37:18). It boils down to fading losing traders, because it’s easier to find a losing trader and do the opposite of them than to find a winning trader to follow.
That might well go against everything you’ve ever been taught, because concretely, it could involve things like shorting breakouts and EPs. Then again, is that so mad? Most traders lack discipline and situational awareness. Combine that with the fact that many breakouts and EPs do fail, and you just might be able to find some sort of edge there. As Tom says at 40:00:
“There’s a lot of people that will tell you that you can’t do something because they can’t do it.”
I’m not telling you what to do, besides the fact that you must put in the work to be successful. Your edge is your own. Allow the greats to point you in the right direction, but ultimately you must find your own truth. With creativity and hard work, you truly can achieve a lot.
And just to quote Tom one last time for today:
“Always remember: If you’re not working on your edge, someone else is.”
Conclusion
This was the final part of my Tom Dante series — specifically, on his “Stop Moaning and Start Improving Part 2” video. The video that is my answer to the question I tweeted on 15 August:
It truly had a lasting impact on my journey, and I am so grateful to have come across this video. It completely changed my approach to journaling, suggested all sorts of ideas I’ve still never heard anyone else suggest about ways of becoming (more) profitable and, as a very nice bonus, is incredibly entertaining. The video may be 45 minutes long, but holds my attention from beginning to end, every time I watch it.
I hope you’ve found this series interesting! And do let me know in the comments below if you want me to do more longer series like this, whether about Tom Dante again or another trader.
More content like this
All my Tom Dante notes are here. All my stacks about journaling are here.
The Trading Resource Hub’s full archive is here.
Next up: David Ryan. In case you missed it, I have already written about one of his early experiences here. I’ve also written up notes on an interview with his son, Sean Ryan, here.