Where Do You Get Trading Ideas?

Trading ideas are everywhere, you just have to look and recognize them. The best ideas are intuitive and easy to explain. A trading idea doesn’t have to be mind blowing to work, it only needs a sound premise. Cobbling together a strategy with a bunch of indicators and tweaking the money management isn’t an idea, even if it does produce a great equity curve after several optimizations, what you’ve done is created a strategy that works perfectly in the past, via curve fitting, but has little hope of working on markets it’s never seen.

Types of Trading Ideas

When you’ve been doing this long enough you start to catalog ideas, here’s some:

  • Trends based on some identifiable factor like the monetary policy of the Federal reserve. Trends are by far the most followed pattern.
  • You could exploit the relationship between two similar stocks or futures in a statistical arbitrage (pairs trade). Perhaps even an inter market relationship like the auto industry and platinum group metals (primary use is catalytic converters for gas powered engines), or soybean vs soy meal.
  • There are seasonal patterns, speaking of soy beans, in agriculture, heating oil; did you know 40% of heating oil price movement is influenced by supply-demand issues in the northeastern United States, and weather is a big factor. Airlines and resorts have seasonal patterns that are easy to sort out.
  • Selling premium up to a big announcement or earnings report, or buying volatility cheap after the earnings are announced and volatility has crashed.
  • How about turnaround Tuesday, or over the weekend patterns, or same time next month when funds redeem and add to their position.

I could go on, as there are an unlimited number of ideas out there that are exploitable and profitable, if it’s a sound premise and you see it, then figure out how to trade it. Until you put up the money, your ideas are just that, ethereal moments in time, but ain’t worth a dime.

The best way to get in tune with the market and the economy is to get yourself involved, trade geopolitical events, wait for zinger economic reports and fade the move, be early on the spot by monitoring juicy breaking news from web news sites like The Fly on the Wall. When you have your money on the line, working for you, your attention is attenuated and focused. This is when ideas are born.

Trading Ideas Matter

If you think you’ll do well in the trading business with your idea de jour, think again. Someday that idea isn’t going to work. A constant stream of ideas is what you need, in fact it is the very life blood of a successful trader to stay ahead of, and take advantage of opportunities in these constantly changing markets. So, how does a trader come up with new ideas, and not just rehash the tired old ones?

“I begin with an idea, then it becomes something else.” -Pablo Picasso

The big mistake traders make looking for ideas is looking in the same old tired places. The market is reflective of what’s happening in the world, so doesn’t it make sense to expand your notion of a trade to the real world? Maybe, maybe not, perhaps you have to jump to the non-real world. The point is, trade idea generation is exactly like any creative endeavor, there are lots of ways to do it, just google “how to generate ideas.” That’ll get you going.

Most creatives use a process for generating ideas, let’s apply that to trading.

Research is first, you should focus on a particular market, like Oil for example. Start by looking at key reports, such as the petroleum status report, which comes out every Wednesday, and the weekly Natural gas report on Thursdays…ask yourself what happens to the market after these reports, how about before the reports…do you see patterns. Study why investors care, perhaps that will lead to research around OPEC and what they are currently up to, both business wise and political.

Most events experience a half-life, that’s where the maximum intensity of the report will last a certain number of days, then fade away until the next report. Ask yourself, what’s the half life of oil inventory reports? Is there a reversion to the mean that’s noticeable, or are these the beginning of momentum plays. Look for secondary markets that confirm a change in price of crude, like gasoline, maybe there’s a trade there, or maybe just a confirming indicator. Are there seasonal influencers, or weather anomalies at play. How many oil rigs might be affected by a nasty tropical storm, what about just the fear of a big storm coming.

Do you see how each question leads to another?

Once you’ve identified a pattern, think about how you can turn it into a trade. What are the setups, the ranges in time and price, what’s the average duration of the trade, what can go wrong, what can intensify the effect…on and on, one idea begets the next.

Let’s Get Real

It’s all and good to throw hypotheticals at you, but how would you actually turn an idea into a real trade? Well, let’s do that with crude oil. Perhaps we can trade some behavior we noticed crude takes after an impactful report. Let’s first develop the strategy.

After a big move does crude oil tend to fall back in line or does it continue down a path. In other words, is this a reversion to the mean or momentum play? Will the path be a circle (reversion) or momentum (line). From my research, crude is definitely a momentum play, so we’ll want to look at the strategy as a trend follower, but relatively short in duration due to the weekly reports. So we’ll make the following assumptions:


  • 10-day loopback covers 2 weekly status reports and smoothes out noise.
  • A move of 4 to 5 standard deviations over 10 days is big enough to matter, and small enough to generate enough trades.
  • Giving price at least two days of pullback will allow us to stay in the trade, while providing the room to discover a trend.
  • Holding the trade for 20 days allows the strategy to catch bigger market moves

Here are the Rules

  • Enter Long when the close > close 10 days ago + 4 standard deviations
  • Enter Short when the close < close 10 days ago + 4 standard deviations
  • Reverse the trade after two days if there’s a new signal
  • Exit the trade after 20 days

Results and Next Steps

I have executed this trade 4 times so far this year with excellent results, all four trades were big winners. I did 2 trades last year that has similar setups, but this year’s trade represents a refinement. How did I refine the trade you might ask? I varied some of the assumptions by trying different loopback periods, and varying the standard deviation threshold. I also incorporated a confirming market, using Heating Oil and looked for divergences.

I noticed a profound inverse relationship between the difference in price between crude oil and heating oil, and the price of crude oil alone. I also noticed this same inverse relationship of the Crude-Heating pair versus the S&P 500. With major changes in the market usually having a 2-3 day lagging effect on my trade.

I will continue to study this trade, and see if there are further refinements that can be made, or other triggers that can help it, confirm it, or turn it into something completely different. That’s the nature of trade idea generation.

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