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Hey, this is Sasha Evdakov, and thanks for joining me here for another episode of let’s talk stocks.
Before we get going into this lesson, which is really going to cover the two methods of you getting results or staying profitable in the stock market. There’s two main ways, it’s a convergent way and a divergent way, which we’ll talk about in a second.
But before we get there, I wanted to let you know that the book, “20 rules for investing success” that I have written, that’s going to be for free, is out and available for amazon kindle.
Because we just ran into a couple of things, by the time you get the book approved, uploaded, and then you go ahead and schedule the promotion, there’s a few days that go through that process, because they review it, takes up to 3 days, and then you schedule the promotion, which it can’t be on that same day, so in either case, that book will be available absolutely free, especially for those of you on the newsletter list, I’ll let you know exactly when it’s going to be available on that kindle promotion time frame.
You basically get 5 days to have that book for free, and I would actually list it for free on amazon if I could, but it’s listed right now at the $0.99 price mark, which is the lowest that you can list it.
Once that promotion kicks in, you’ll be able to get it for free for those next 5 days, and then after that, I’ll make it available on PDF format on our website, and you’ll be able to download it for free
It’s just something that I think you should look through, read through, study it, even if you just skim through some of the rules and insights, just use it to your benefit, it’s my little way to say thank you for being a part of the newsletter, thank you for watching my videos, and just some more insight for you to continue to get to work, continue to learn, maybe open up your mind a little bit more.
If you want a little bit of a deeper study, if you want to go into some other rules and tips, then I also have written a little bit more detailed of a book, go ahead and take a look at the book “100 stock trading tips”.
That book is going to go into some of the things that I cover also in the “20 rules for investing success”, but it’ll go into a lot more other ideas, a lot of other concepts and just share with you some other interesting tips and insights for trading. So take a look at that, if you want a little bit more substance of a book.
Let’s get going on this lesson. This lesson is really all about two strategies or systems that you can use for your trading. When I’m talking about systems and strategies, I’m not going to go into, let’s say, the technical systems and strategies that you personally are going to use to create and execute a trade.
It all starts with the foundation
I’m talking about the foundational level of a system or strategy, and the reason I say foundational level is because everything really stands from that foundation, if you have a house foundation an it’s this wide, you can continue to build that house and you can continue to expand it, evolve it, and grow it vertically. So the foundation kind of dictates what you could do.
And even on a house that’s this wide, you can still build out the foundation, something along this line or level, and it’ll still be fairly stable and still be ok.
But once you start getting into a structure that’s a little bit warped, let’s just say it’s maybe getting into this level and you have all this weight, with that weak foundation, when you have this weak foundation right here, all that is pressing down with the weight and gravity on it, and it really becomes unstable.
In this lesson, what I’m really going to be talking about and sharing with you in this simple lesson, is about this foundation, about these two core things, methods, systems, strategies, that you need to decide which one is going to work for you, for your trading.
And from this foundation, you can start getting into a lot of other structures, a lot of other systems, so you can start building and creating your own system, and I’ll come up and create some fantastic new structure or architectural thing, and that’s really when you get into specifics of your own personal trading strategy and system.
But really it all starts with the foundation, if you know and understand the foundation, then you can apply it to you and what works for you.
Convergent and divergent thinking
Alright, so what are these two methods or strategies to get these results? Well, I like to break them apart into convergent, and the second one is going to be divergent.
This is just a naming concept that I’m using in order to reference these strategies, these ways to get results, in order to explain them better, so that way you know which one I’m talking about.
Both of these refer to the thinking process. It’s all about thinking, but convergent thinking, when things converge, it’s really all about inputting ideas and things into one area. And a lot of times, when you’re thinking convergently, a lot of times it’s very fast, it’s very quick. So you’re doing things very fast and quick.
Divergent thinking is more something like along the lines, you have your main concept but now your thinking starts to spread in the outward direction, so you’re diverging.
It’s a mathematical kind of thing. And you’re coming up with ideas and concepts, but then once you have these ideas and concepts, it’s a little bit slower, it’s a little bit more creative thought process.
How does this apply to the stock market? If you start looking at your own trading, well, you can see already, between a fast and a quick vs. a slow and creative process, it’s a lot different, they’re both very different.
Convergent trading strategies
When you look at it in the stock market world. If you have a convergent based strategy, versus a divergent based strategy.
With convergent strategies, you’re looking at, let’s say, when you’re talking about your losses, so here if we have losses, you’re going to have a lot, many loses here, but then your wins, you’re also going to have a lot of wins, but both of these, when you’re talking about convergent, they’re small, they’re very tiny in the incremental.
Think of this more as a higher frequency trading, so this is more like day trading. Think of it that way when you’re thinking about convergent trading strategies.
Divergent trading strategies
When you’re looking at divergent trading strategies, this is a little bit different. You still might have many losses, so you still might have a lot of losses that come in, but your wins are a lot larger, because you’re more patient. They’re a lot slower in the sense. So your wins become a lot bigger, so think of this as kind of the turtle.
If I was to put an animal towards this, when you really start thinking about it, think of this as a rabbit, and this over here is more like a turtle.
Figure out what works for you
The point is to figure out what type of personality works and fits for you, because this is where you’re going to generate results.
A rabbit operates a certain way, and a turtle operates a certain way, so you need to kind of evolve and look at yourself from the outer perspective and see, are you more of a rabbit? Or are you more of a turtle? Are you kind of looking to gain things slowly, and can you be more patient?
Rabbit vs. Turtle
If we did a rabbit example, how is a rabbit going to trade? A rabbit is probably going to look at that screen, do a little bit of a trade, it’s going to be one trade and you might make, let’s just say here, you might make a dollar on that trade. So let’s just say for simplicity sake, a dollar movement in price.
Then the next time you might make, let’s say 50 cents, and you cash out, you get your profits. Another time you might have a loss of 75 cents, so you have a loss of 75 cents, so your trading is just constantly micro or minimal.
Here, if you’re on a turtle side, your profit and losses, you might still have that dollar, that 50 cent, that 75 cents per share on that stock, as far as your losses and you might still have many of them, so it’s very similar to the turtle, but then your wins are a lot larger.
On your wins side, you might have a stock that goes up, let’s say $7 per share, or $10 or $12 per share, so it’s a lot different in the sense of the type of personality that you have if you’re trading on a divergent style versus a convergent style.
You can combine strategies
Can you use both types of strategies or systems? Can you use something in between, in the middle? Absolutely.
So if you take something like this, and let’s just say here at the top, here’s our convergent and here’s divergent, it doesn’t matter if you flip it the other way around. Let’s just say you have the extreme levels.
And for you, you might actually be somewhere more in the middle so it could be somewhere over here, you don’t have to be the outlier all the way up here or down here, you can be somewhere in this range and still use your system, use your strategy and be ok.
Can you also have two systems or strategies? Yes you can, you can have two of these, so you can have a convergent ad a divergent strategy, so for example, on certain times you may use a convergent strategy, exceptionally convergent, very high frequency, very active in the markets. And then other times, you may be very divergent, or you can have multiple positions on.
Make sure you understand what you’re doing
For me I like to separate accounts, and that way it keeps things simple, but really, when you do this, you have to really make sure you’re understanding what you’re doing and when you do things, why you’re doing what you’re doing. I know that sounds like a mouthful but you have to really understand what’s going on beneath the surface and why you’re attacking something, why you’re doing a certain trade.
Here on a convergent strategy, when would I personally do this? So looking at myself, maybe you can mirror or reflect some ideas, and maybe it works for you, maybe it doesn’t.
When and why
When or why would I use a convergent strategy? When would I do this? Well, the time to do this type of strategy or system would be more when there’s higher volatility. With higher volatility stocks would move up and down a lot more.
With that movement, this is why professional traders love volatility, with that movement, it allows you to get into the stock somewhere over here, it doesn’t matter, and then later you can sell it on the pop. Or you can short it somewhere over here, doesn’t matter at which peak, and then buy it back at the bottom, if you’re doing shorts.
Other times, you may do things that are more divergent, and when do you do this? When volatility levels are low. So this one is when volatility levels are high, this one’s when volatility levels are low.
Volatility levels now would be contracting, so they would be smaller, so what happens to stocks when volatility goes down?
Typically, stocks move higher as volatility drops, and what happens when volatility pops? Well typically stocks move down, because volatility increases, that means more fear in the market, more whipsaw action, and that’s why you get a pop in volatility as stocks drop.
The gravity effect
Whereas when volatility is dropped, you get a slow rise, it’s kind of like a slug, a turtle crawling up the mountain as that volatility drops, because you have to push something.
It really comes down to a gravity effect, if you’re looking at everything in the sense of gravity, in the sense of everything’s pushing down from that ceiling, there’s energy that you need to push that stock higher.
Just to hold something up, like let’s say this market, it’s not very heavy right now, but just to keep holding it up for one minute, it takes a little bit of energy, for 5 minutes, it takes a little bit of energy, 10 minutes, takes more energy, 30 minutes, an hour, five hours, if I try to hold it up for 10 hours, that amount of time requires much more energy, and that’s what happens, you have to remember, it’s all about energy.
If you’re trying to hold prices at that higher point, it takes more energy, that means more buying has to come in, more buying, more buying, more buying, just to hold the prices. So there’s all that energy that’s trying to push those stocks higher that needs to be put into the market in order to keep those prices higher.
Going back to the bigger picture, when you have something that’s divergent versus convergent, you need to figure out which personality type fits for you more. Typically most people would fit into one or the other, and I will tell you for me personally I’m more of a divergent strategy person.
I don’t like to be in front of the screen all the time. I’ll watch the screens, but I don’t want to be too attentive to them, so I rather prefer slow growth, but stable growth.
Whereas here with convergent strategies, you get more compounding effect, because you get to carry out your wins, and then you take that profit and you reinvest it, but for me that’s a lot of energy that I need to use in order to make those profits, whereas with divergent, I can simply just put on my trade, let it sit, let it marinate, slowly works for me, take my profit, continue on to the next trade.
So you need to figure out what works for you, the question is, do I trade a little bit more on a convergent level? Do I do a little bit more high frequency trading, or do I do a more fast and quick type of trading in volatile markets? Yes, I may do that, it depends on the market, conditions and how things look.
But the core of my strategy, most of the time, I’d say 80%-90% of the time, I’ll still stick to my core, what works for me, and that’s the divergent strategies. They’re slow, they’re simple but they work.
Patience is key
And for you, you need to figure out what works for you. Are you more a patient person? Because this one requires a little more patience, whereas convergent requires a little less patience, because you’re in and out of trades, you’re actively trading, you’re the type of person, oh I have to put on a trade, and that’s ok, so long as you’re managing things accordingly, but you have to remember that you probably have smaller losses and smaller wins.
And that is simply because if you’re trading for a shorter period of time, a shorter period of time, stocks can only go up for so long. Whereas if you hold them for a couple of days, weeks and months, they can go up for a lot longer period of time.
You need to find our balance of what’s working for you, and of course, you can do both, you can use convergent and divergent strategies within your account, but typically doing both at the same time until you’ve mastered one or the other or at least have a consistency with one or the other, is a very bad idea.
What you want to do is figure out which one works a little bit better for you, go to the extreme level, do a little bit more high frequency things, and if you’re feeling a little more emotional during that trading, then go ahead and attempt the divergent strategy, buy it lighter, wait for things, be a little more patient and see which one works for you, which one works and fits your personality type a little bit better, it’s kind of like playing match maker.
You have these two concepts and these are the core foundational concepts and then you’re trying to be a match maker to see which one you get along with, which one is going to be your lifetime partner in the trading world, and that’s what you’re doing.
From here, you start getting into, again, other little strategies, so you’ll have a multitude of strategies from both of these in the way that you want to trade, so there’s sublevels beyond that, and you can do things in all sorts of ways, in creating your trading system, in creating your trading style.
Tweaking your strategy
But this is the core, this is the foundational level, once you get this part, now you start tweaking that strategy, you start looking at other things, you start looking at, am I more of a person that’s looking at fundamentals? am I looking more at charts? am I looking more at the momentum or the health of the market? Am I playing it based on a pattern based system? Or am I playing it based on maybe a trend system? where you see a trend continuing time and time again, like three updates and then you’ll go in and play that stock. You’re looking at all those things and then you fine tune those things.
But first you need to understand which one’s fitting you and your personality type better. And you’re really kind of choosing which one suits you the best for your trading appetite and your trading style.
Once you have that, you can of course go ahead and implement and use the other one, depending on market conditions and so forth, but you don’t have to, if it’s not working out for you, then just stick to your core, stick to your strength and do what works.
I hope that was helpful, as you can see I take things to that foundational core level, and I like doing that in order for you to really see things from another perspective, because if you understand the basics, the foundation, the fundamentals to how things work and operate, it allows you to start breaking things apart and putting things together for what works for you, because it’s not about me, it’s about what’s working for you, so you need to find what personality type fits to that trading style of yours.
Once you have that, then you’ll be able to say, this is working for me, so now half of those other strategies, you can eliminate, you can now focus on these other half, and that really just simplifies things a lot more, and now you start breaking that apart into another level and another level.
Quick little example here. If you take this 80/20 principle, or let’s just say this half way point, so here we have convergent and divergent, you can think of this also as an 80/20 principle, where 80% - 20%.
In either case, here we have convergent and divergent, so now you take one that works for you, so if you take this, and now break it apart, so now you get all your divergent strategies, so that’s what this is, and now again, you start breaking this apart on what works over here.
This might be a pattern system, so now you break that apart and that gets even smaller, so you just continue breaking that down further and further until you get a little box that’s tiny. It might not even be that tiny, it could be a little tiny box right there, and that’s what works for you, and if that’s what works for you, just keep doing it over and over again.
And that’s what you’re trying to do, you’re taking that core, breaking it down, breaking it down further and continue doing down, the same thing with this 80/20 rule, you keep moving, moving, moving until you get to that 4% that 2%, 0.5% of what’s really working for you, your core.
And that’s really what I wanted to share with you, it’s not really just about showing you a system that’s golden, a system that works that you can go ahead and buy your fancy things or whatever.
Because all these systems, all these different things they all work, everything really in the market works, because you could be a bear and make money, you could be a bull and make money, and you can even be non-directional, if you’re trading options, and you can still make money, so you can have no opinion on the market and you can still make money.
The important part is you relate to the system or strategy that works best for you. If you’re constantly trading in a style and a system that’s not working for you, then you’re not going to be successful.
For example, people who are day traders, there are day traders that are successful, yes, there are people who trade Forex that are successful, there’s people that trade options, and you might be wondering, which one should I trade? Which one makes more money? It depends on what’s working for you, because an option trader is going to be a little bit different mentality than a Forex trader, and it’s going to be different than a day trader.
They all have a little bit of a different risk profile, risk tolerance, what appeals to them, and that’s why they’re trading the way that they’re trading.
And that’s what you need to do, you need to be figuring out what’s working for you, and now that you’ve chosen, let’s say stocks and options, which is actually the core for me, so I would assume that you’re watching this because you’re interested in stocks and options, now you’re looking at a strategy specific system. So do you want divergent or do you want convergent?
You choose and then you go to the next level, then what do you want? From there you choose one or the other, You take that, you keep breaking it apart, and you keep breaking it apart and then you fine tune that strategy and system that works for you.
Because you’re either a turtle or you’re either a rabbit. And those are completely different animals, they operate and work in a completely different way, and yes, you can be sometimes a turtle and sometimes a rabbit, depending on market conditions and the environment, if you can transform that and do that, it’s really good.
But for some people, if you just can’t do that, then stick to your core, stick to what you are, and do the thing that keeps working.