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Hey, this is Sasha Evdakov, and thanks for joining me here for another episode of let’s talk stocks.
This lesson is going to cover the two methods of getting results or staying profitable in the stock market. But before that, I want to say that there are two main ways. There is a convergent way and a divergent way, which we’ll talk about in a second.
Also, 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 are a few days that go through that process, because they review it, takes up to days, and then you plan the promotion. That promotion can’t be on that same day so that that book will be available 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 get five days to have that book for free, and I would list it for free on Amazon if I could. Right now it’s listed at the $0.99 price mark, which is the lowest that you can register it.
Once that promotion kicks in, you’ll be able to get it for free for those next five days. After that, I’ll make it available in 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, and study it. Even if you skim through some of the rules and insights, 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 as well. Reading it will give you some more insight, and it will help you to continue to learn. Maybe it is going to open up your mind a little bit more.
If you want a little bit of a more profound study, if you're going 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 also cover in the “20 rules for investing success”. It’ll go into a lot more other ideas, a lot of different concepts and share with you some other interesting tips and insights for trading. Be sure to 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 all about two strategies or systems that you can use for your trading. When I’m talking about methods and plans, I’m not going to go into the technical systems and strategies that you 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 the foundational level is because everything stands from that foundation. If you have a house foundation, you can continue to build that house, and you can continue to expand it, evolve it, and grow it vertically. So the foundation dictates what you could do.
And even on a house that’s this wide, you can still build out the foundation. And it’ll still be relatively stable and still be ok.
But once you start getting into a structure that’s a little bit warped, with that weak foundation, and when you have this weak foundation, all that is pressing down with the weight and gravity on it. What happens is that it becomes unstable.
In this lesson, what I’m going to be talking about and sharing with you in this simple lesson, is about this foundation. It's also about these two core things, methods, systems, strategies, that you need to decide which one is going to work for you and your trading.
And from this foundation, you can start getting into a lot of other structures, a lot of different systems. You can start building and creating your system, and I’ll come up and create some fantastic new structure or architectural thing. That’s when you get into specifics of your trading strategy and system.
But it all starts with the foundation. When 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 to reference these strategies, these ways to get results, to explain them better. 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 all about inputting ideas and elements 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. That way you’re doing things speedy and quick.
Divergent thinking is more something like along the lines, you have your central concept, but now your thinking starts to spread in the outward direction. That means 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 trading, you can see already, between a fast and a quick versus 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 when you’re talking about your losses. If we have losses, you’re going to have a lot. But you’re also going to have a lot of wins. 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, but your wins are a lot larger because you’re more patient. They’re a lot slower in a sense. So your successes become a lot bigger, so think of this as kind of the turtle.
I was to put an animal towards this, to explain better. 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 manages a certain way, so you need to evolve and look at yourself from the external perspective. And be honest with yourself, are you more of a rabbit? Or are you more of a turtle? Are you 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, make a little bit of a trade. Then it’s going to be one trade, and you might make, you might make a dollar on that trade. 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. 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 cents, that 75 cents per share on that stock, as far as your losses. And you might 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. It's different in the sense of the type of personality that you have if you’re trading on a divergent style versus a convergent manner.
You can combine strategies
Can you use both types of strategies or systems? Can you use something in between, in the middle? Absolutely.
You can take something like the following. Here’s our convergent and here’s divergent, it doesn’t matter if you flip it the other way around. Let’s say you have the extreme levels.
And for you, you might be somewhere more in the middle. You don’t have to be the outlier up here or down here, you can be somewhere in this range and still use your system, use your strategy and you'll be ok.
Can you also have two systems or strategies? Yes, you can, you can have two of these. You can have a convergent ad a divergent approach. 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
I like to separate accounts. That way it keeps things simple, but really when you do this, you have to 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 understand what’s going on beneath the surface. But not just that. You have to understand why you’re attacking something, why you’re making a specific 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. Perhaps 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, and then later you can sell it on the pop. Or you can short it, doesn’t matter at which peak, and then repurchase it at the bottom, if you’re doing shorts.
Other times, you may do more divergent things, and when do you do this? When volatility levels are low. When volatility levels are high, this one’s when volatility levels are low.
Volatility levels now would be contracting, so they would be smaller. What happens to stocks when volatility goes down?
Typically, stocks move higher as volatility drops, and what happens when volatility pops? Well, usually 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 like a slug, a turtle crawling up the mountain as that volatility falls. Because you have to push something.
It 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.
To hold something up, it takes a little bit of energy, for 5 minutes, it takes a little bit of heat, 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, to hold the costs. There’s all that energy that’s trying to push those stocks higher that needs to be put into the market to keep those prices higher.
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. I will tell you for me - 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. I instead prefer slow growth, but stable growth.
Whereas here with convergent strategies, you get a more compounding effect. That's the case 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 to make those profits. Whereas with divergent, I can put on my trade, let it sit, let it marinate, slowly works for me, take my benefit, and continue to the next trade.
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 is that I’ll still stick to my base 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 that type of person. But you have to remember that you probably have smaller losses and smaller wins.
And that is just because if you’re trading for a shorter period, 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.
You need to find a balance of what’s working for you. You can do both. You can use convergent and divergent strategies within your account. But typically doing both at the same time is a terrible idea. Until you’ve mastered one or the other or at least have consistency with one or the other,
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 bit more patient and see which one works for you and fits your personality type. It’s kind of like playing matchmaker.
You have these two concepts, and these are the core foundational concepts, and then you’re trying to be a matchmaker to see which one you get along with. To see 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 other little strategies. So you’ll have a multitude of strategies from both of these in the way that you want to trade. There are sublevels beyond that, and you can do things in all sorts of ways. You are creating your trading system and 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 fits you and your personality type better. And you’re 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 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 for you to see things from another perspective. Because if you understand the basics, the fundamentals of 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. That's why you need to find what personality type fits that trading style of yours.
Once you have that, then you’ll be able to say, this is working for me. Now half of those other strategies, you can eliminate. You can now focus on these another half, and that just simplifies things a lot more. What's more, you start breaking that apart into another level and another level.
A quick little example here. If you take this 80/20 principle or let’s say this halfway 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. Now you take one that works for you. If you choose this, and now break it apart, so now you get all your divergent strategies. That’s what this is, and now again, you start breaking this apart on what works over here.
This might be a pattern system. Now you break that apart and that gets even smaller, so you continue breaking that down further and further until you get a tiny little box. It might not be that tiny, and if that’s what works for you, keep doing it over and over again.
And that’s what you’re trying to do. You’re taking that core, breaking it down further and continue doing down — the same thing with this 80/20 rule. You keep moving until you get to that 4%, 2%, 0.5% of what’s working for you, your core.
And that’s what I wanted to share with you. It’s not just about showing you a golden system, a system that works that you can go ahead and buy your fancy things or whatever.
Because of 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. You can have no opinion on the market, and you can again make money.
The important part is you relate to the system or strategy that works best for you. If you’re continually trading in a style and a system that’s not working for you, then you’re not going to be successful.
For example, some people are day traders; there are successful day traders. Yes, some people trade Forex who are successful. Some people 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. 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. If you choose stocks and options, which is the core for me, 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 tearing it apart, and then you fine-tune that strategy and system that works for you.
Because you’re either a turtle or you’re a rabbit. And those are entirely 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 handle that transformation - do that, it’s excellent.
But for some people, if you can’t do that, then stick to your core. Stick to what you are, and do the thing that keeps working.