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I wanted to spend a few minutes on the blog this week talking about what Inventory trading actually is. I wrote a book on it. I started a website where I try to teach people about it. But I don’t think I have taken sufficient time to talk about what it is and explain my evolution in inventory trading.
Why Did I Write the Book?
By now, most of you have probably read the book I wrote about Inventory Trading. If not, you can get your copy HERE. But you probably have and I thank you for that. It was a great way to get my thoughts on paper and get the idea out to the universe of traders. But things have evolved since then, I mean that was like two years ago. In technology terms, it’s ancient. But it has evolved, not so much in practice or even theory but in the way I can explain it.
Most times, when people ask me what inventory trading is, I talk about a warehouse. I talk about walking into that warehouse every morning and having to fill my shelves and then wait a period of time for buyers to come take that inventory off my hands. These days, I empty my shelves every day. I carry nothing over night or even into the afternoon for that matter. I love to turn my inventory quickly. It limits my risk. Some may say it limits my opportunity but I don’t believe that at all. I take what I want and what I had planned for and nothing more. Keeping greed and fear out is rule #1. I will talk more about why later.
The shelves can be stocked with longer term inventory as well if it is planned and purchased as such. Same idea different time frame for the trade. I don’t do this anymore because as a full time trader and not an “investor” I have different goals and plan things differently. That’s a conversation for another day though.
So basically, that’s what I discuss in the book in very condensed form. So how has it changed?
Like I said, nothing has changed in theory or practice but how I think about the business and what I think I am good at has maybe taken a bit of a turn. I don’t think I would ever refer to myself as a trader anymore, unless you are referring to those old guys who used to carry around beaver and fox pelts to trade for other things. Maybe…
So what do I do? What would I refer to myself as now?
Well, I am very good at finding value. I am more like a purchasing manager for that warehouse I talk about. It’s MY JOB to find good deals on the things that are going to fill my shelves. I am in charge of finding value on assets. I need to understand where things are undervalued and overvalued. Not cheap and expensive. Those words have different meanings than overvalued and under valued.
How do I do that? I use charts. Charts give me insight into the value of an asset and nothing more.
I get this weird feeling when I read most of the content on trading out there like people want to treat each bar and candle as some intensely unique event. It’s a representation of value. That’s it. So many times I feel like the trading systems and automated systems for sale want to treat the markets like a video game that has a logical path and rationale. It’s just not the case. These bars represent emotions like fear and greed and they can be highly irrational, not like a video game. You can play the same level on a video game over and over and it will act the same until you accomplish your objective. The markets will not. It would be as going into a video game level and having no idea what will happen every time you start it. It’s not rational and built on logic, it’s built on emotion.
But that’s why inventory trading works. It uses the forces of the market to find opportunity if you can be patient for them.
Handsome gains pic.twitter.com/89Wueb8ip1
— Trading Proverbs (@tradingproverbs) October 26, 2016
Now, I know without a shadow of a doubt that this is the key to the market. To find value when others don’t. It can be on an intraday basis or on a monthly chart but you have to determine where value is.
So if I had to sum up inventory trading now, I would say it is simply the ability to refocus your intentions on what’s actually important in the market, that being the actual value of an underlying asset of a chart, not the chart itself or the indicators. It’s not a video game, don’t treat it like one. Find your ability to determine value from a chart and you can trade anything. From real estate to baseball cards to sugar. If you give me a chart, I will eventually be able to tell you where value is and that should be your goal as well if you want to have a long career as a market participant.
That is trading. And that’s where inventory trading is heading. I have always wanted to bring the business back to trading and this is how I will do it. I will teach people how to use charts to find value, not systems and video games.
I hope you have a great week and I will talk to you again next Monday.