Most people I know enjoy Pizza and have a Pizzeria that they claim makes the best slices of XYZ imaginable. Not too odd a statement, considering Pizzerias should be good at making Pizza, right? Now imagine that same person you spoke to going into their favorite Pizza joint and asking the owner to make them some tacos. Now, the Pizzeria probably has the ingrediants necessary to whip up a makeshift taco, and the chef is probably talented enough to pull it off, but that is not their specialty; it is outside of their core competency. As a result, the owner, who is sticking to his original business plan, will probably say something to the effect of, “Listen so-and-so, I know you come here a lot, but I simply can’t serve you tacos, I make Pizza.” As a result so-and-so takes his business for that day elsewhere.
Now you’re probably thinking “This is an investing / trading blog, what on earth is this nutjob talking about Pizza for?” Well I’m glad you asked.
Let’s get to that answer by breaking down the above situation into its core principles.
1. The owner opened a Pizzeria with the intention of selling Pizza to make money.
2. There are a billion other businesses he could have formed to make money, but he chose to specialize in making pizza, and that is fine!
3. He is equipped with a handful, or in some cases, all, of the skills necessary to serve customers outside of his core business of making pizza, yet chooses to pass on those scenarios because they do not fit the parameters of what he originally set out to do, make Pizza.
4. As a result, he can focus on maximizing profit from every person looking to purchase Pizza, while not getting distracted by the other money making opportunities that are inevitably going to be present around him.
Simple enough right? Now let’s bring the converation back to trading / investing.
First off, we all know – or should know – that there are a variety of strategies capable of making money in various market arounds the world. None of these processes are correct in their own right and nobody has the right to tell you that their process is any better than yours – trust me, the market will let you know -. The key is, that in order to be succesful, market participants need to stick to their outlined process without getting distracted by other setups or opportunities out there. Sure, as a technical trader you’re probably familiar with a variety of the tools and indicators other people use, but you’ll probably not be as successful as them in executing their particular setup because it’s not the one you’ve spent time mastering. Just like the Pizzeria making Pizza, you set up your trading business on the premise of a specific process and should stick to that.
Now, in case my message isn’t crystal clear just yet, I’ll tie in an example to drive home the point of this post.
Below is a setup in $ANF I pointed out today after the close:
The post on stocktwits/twitter included this premise: $ANF, not my type of setup, but positive divergence & closed on highs of the day. Looks ready to breakout.
There is nothing incorrect about the above chart and statement, it is a setup that can make money. In fact, there are a number of traders who would love to take this type of setup and I know it because they liked and retweeted my post minutes after it went up. So what’s the issue, aren’t I here to make money? Why am I passing on a setup that many people would jump at with a simple break above $29 level? If you can make money, who cares what type of setup it is!?!?
These are all valid questions, but if I’ve learned anything over the past few years studying and trading markets, it’s that it’s tough enough to be good at one type of trade or area of expertise, let alone be a successful jack of all trades. I have a detailed process that I follow and this setup does not have all of the factors that I look for in a trade, therefore I can’t put it on; it’s that simple. Like I said before, there are always going to be distractions, times when your strategy is lagging others, times when you seemingly don’t have much to do, but if you’re going to be successful you’re going to have to stick with your process for the long haul.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.
Credit to someone at T3Live (I forget who specifically) who introduced me to this metaphor when I first started studying markets a few years ago.