Irrefutable Law of Trading Success #4: Plurality Equals Profits

The 10 Irrefutable Laws of Trading Success, Law #4: Plurality Equals Profits. 

Okay, plurality equals profits. What is plurality? Plurality is when an asset class or a sector, all the stocks or all the futures or all the products within that asset class or within that sector, pluralities when they go up together or they go down together. So, let's just say for example, we're looking at grains. If we look at grains, we have soybeans, we have soybean meal, we have soybean oil, we have corn and we have various types of wheat. We have Kansas City wheat, we have Minneapolis wheat, we have Chicago wheat. Okay, so plurality is when all the grains are going up together, or all the grains are going down together. You can have situations where only one of those products is going up. For example, there may be bad weather in the Midwest, in areas like Kansas, Iowa, Nebraska, in the winter, which affects the winter wheat contract and so the price of wheat may be rising, while the price of soybeans and corn and soybean oil and soybean meal are going nowhere or going down. This is a localized product issue with wheat. When we see this, when we see just wheat going up, what we know is that move tends to be a lot more muted. It tends to be less dynamic, it tends to have more pullbacks, it tends to have deeper pullbacks and that's because that move is driven by the fundamentals of one product. Now, if we get into a stage where we have inflation, or we have deflation, for example, if we get into macro economic environments, we can have a situation where inflation is rising and because inflation is rising, all the grains go up. Corn goes up, soybeans goes up, soybean meal goes up, soybean oil goes up, wheat goes up, they all go up. What this means is that longs tend to perform much better when they're all going up than when just one of them going up. If we see all the grains rising, we have more confidence that our buys are going to work. 

Now, same thing with stocks and in stock sectors. We could look at a sector and there might be one name, that's really strong in the sector, and it's rallying. When it's rally on its own, the fundamentals of that stock are carrying it. It's not being supported by the economy. It's not being supported by a macro theme in that sector. So for example, right now, one of the hot themes is AI. So all the AI stocks have been going up, not just Nvidia, all of them have been going up to various degrees. This gives us more confidence in the idea of going long in AI. Because there is some type of macro influence, which right now is everybody is a big believer that the new hot theme is AI and they're investing in companies even if they don't make money because they believe so much in the theme. So we've gone through and we've tested this over and over again and this tends to be one of the more reliable filters that you can add to improve your trading. Now if you just trade one product, this is still important to be aware of. Because if I'm in that one product and that product is in a trend, I know that other correlated products are trending also, it's got a better chance to last. If it's going by itself, I have to be a lot more sensitive, I have to be quicker to be ready to take my profits. So do you look at plurality in your own trading? Do you know what the correlated products are to what you trade? share one quick thing with you here we talk about the brother sister relationship. Everything you trade you should be looking to see what is the sibling relationship? What is the brother sister relationship? What this means is there's a product out there, what is the product that has the highest correlation to what you trade? So if I was trading crude oil, it could be Brent versus West Texas. If I'm trading soybeans, it could be soybeans vs. Soybean meal, if I'm trading Nvidia could be Nvidia versus AMD, advanced micro devices or TSM, Taiwan Semiconductor. But what I do is I pair those together and when they go up together or go down together, that gives plurality and goes back to last week with relative strength, it gives me a sense of who's stronger. I want to buy the strongest, I want to sell the weakest and if they're going up pluraly, well, that gives credence to me being long and I can actually start to do some really creative things, which is that when I want to appeal my position, instead of selling my longs, I could actually sell the weaker product and go into a spread and then the spread can outperform. There are all kinds of cool things we can do with this. I just wanted to share that with you. 

These 10 Irrefutable Laws of Trading Success.... if you pay attention to these, and you take these back into your own trading, you're gonna see a map to massively improve your performance. So, I did what I said I was going to do, because what is today? It's Trader Tip Tuesday and what do we do on Trader Tip Tuesday? We deliver tips to you that help take your performance to an elite level. I'll see you next Tuesday.