Anyone can have a good idea. Very few know how to survive it.
If you made it through Part 1, you should kind of get it now. You understand what actually moves stocks, not what should move them, but what does. You've seen how sentiment can make a 15 PE stock trade like it's about to cure cancer, how pension fund rebalancing can trash perfectly good companies, and how the same ticker can ping-pong between meme stock, a macro hedge, and margin call fodder faster than you can check your P&L.
But that was the map, and this is the manual.
There's a world of difference between understanding how the market works and knowing how to operate inside it. A solid thesis isn't the edge, execution is. The edge, if such a thing exists, lives somewhere between structure and restraint. That's what this post is about.
I've seen great ideas lose money and mediocre ideas pay traders for years. The difference wasn't the chart or the story. It was the sizing, the exit, the timing, the conviction. And, the person.
You want a higher Sharpe ratio? Learn to hold size when you're right and take size down when you're unsure. You want to stop sabotaging your own setups? Start by knowing what kind of setup it actually is. You want to survive long enough to get good? Then build the kind of strategy that lets you function after your worst losing streak.
This isn't about indicators or some perfect strategy. It's about adapting your execution to context. About knowing how to:
Identify asymmetric setups that make sense in your timeframe
Size and scale positions without losing your nerve
Exit cleanly when you're right, wrong, or just tired
Use options like a professional… to define risk, enhance reward, or express a thesis
Protect capital without hedging yourself into oblivion
Manage psychology through systems
This post is long. And I guess it’s written for people who are sick of spinning in circles, for people who already know "buy low, sell high" but can't seem to do it when it matters. For people who want to stop guessing and finally start operating.
You don't need a terminal to become dangerous. You don't need a $100m book to trade like a professional. But you do need discipline, clarity, and the humility to keep refining. The guys with a Sharpe above 2? They're not geniuses, they're systematic killers of bad habits. And I hope this post helps you get closer to becoming one.
Let's begin.
Setups That Work
The best setups don't scream. They whisper, and work.
Everyone wants the perfect setup. But let me ruin the illusion early: there is no such thing.
There are only high-probability conditions, matched with your timeframe, executed with consistency. That's it. No indicator combo will save you. No secret pattern, no magic candle. Just structure, repetition, and edge. Let’s be blunt: most of what retail is taught about technical setups is noise. Pattern-matching without context. Buying breakouts with no understanding of what’s being unwound. Drawing lines on charts without grasping what’s underneath them.
That said, there are setups that repeat, not because the lines are magic, but because market participants are predictable in how they behave around pressure and imbalance.
I bucket the setups that work into three categories:
Narrative Setups
These are trades that align with a strong macro or thematic backdrop and a clean technical entry. They're not just stories - they're stories with teeth.
You're not trading "the AI bubble." You're trading a strong name in a strong group, with flows, earnings, or secular tailwinds behind it, and a chart that just pulled back 12% into the 100-day and caught a bid. That's a setup. That's narrative with structure.
Example setup:
Sector narrative/theme accelerating (AI, semis, clean energy, defence)
Pessimistic positioning, earnings beat or strong institutional flows within last 1–2 weeks
Name reclaims a key level (50/100/200d MA) with volume
Narratives without structure = traps. Structure without narrative = no juice. You want both.
Event-Driven Setups (Catalyst Windows)
This is where the real edge lives for some/
You don't need to predict earnings. You need to understand
The market is obsessed with expectations. That's why sometimes a beat sells off, because the buy-side bar was already too high.
Great post-event setups usually include:
A clear earnings reaction (gap-and-hold / gap-and-fade)
Clean response to guidance
Volume surge with tight intraday movement
Follow-through on day 2 or 3 (post-earnings drift)
These are some of the best multi-day momentum trades out there, but most retail traders exit too early, or can't size because the move's already started. That's the difference between "caught it" and compounding it.
Other catalysts worth watching:
FDA approvals (biotech gold mine)
M&A rumours/deal announcements
Product launches/investor days
Guidance raises from sector peers
Technical / Momentum Setups
This is where price action becomes process, not art or retail mythology.
Technical setups matter. But not because you drew a flag on a chart and called it conviction.
I use trendlines. But not in isolation. I care when a trendline coincides with:
Anchored VWAPs from prior catalysts (earnings, guidance, gap days)
Volume areas that absorbed selling during prior stress
Key Moving Averages
Dealer hedging zones / known gamma pivots
Where price has respected it multiple times on volume
In context, a trendline isn't necessarily a signal. It's a potential decision zone, where flow either confirms or rejects. It prompts the question: are sellers still in control, or has the tape shifted? Are passive bids starting to take the lead?
Here's how I classify high-probability technical setups:
Risk Ignition: Multi-day coiling range after a directional impulse → sharp unwind of weak positioning = asymmetry.
Reclaims: Name undercuts prior low, flushes weak hands, then reclaims the level on volume. Your signal isn't the low, it's the acceptance above it.
Range expansion: Tight tape, then expansion into space, especially if supported by flows or macro backdrop.
Trend retest holds: Multi-week trendlines respected on a low-vol pullback into macro risk (CPI/FOMC/NFP), followed by a reclaim = risk-on signal.
What matters most is how the price trades at those levels. Not that it gets there, but what happens when it does.
I guess what I am trying to say is that strong hands buy structure and weak hands chase. Your job is to lean into those control zones, where you can define risk, size with intent, and scale into conviction when the market confirms.
Entry, Sizing & Scaling (More about this to come in my risk management post)
You don't get paid for your ideas. You get paid for how you size them.
The market doesn't care how compelling your thesis is if your sizing's wrong. And it definitely doesn't care if your entry's random. In professional money management, edge isn't just about being right, it's about how you express the trade.
This section is about three intertwined pillars:
Entry: Where and why you initiate risk
Sizing: How much capital you allocate
Scaling: When you press and when you pare
Let's break them down.
I. Entry Isn't a Price, It's a Process
The best entries are usually boring. Not the breakout, not the FOMO spike, nor the candle that made you gasp.
Professionals enter on acceptance and asymmetry:
Acceptance: Price finds footing. The bid holds. The market digests information and stays elevated. That's your tell.
Asymmetry: The downside is defined. The upside is open. Your risk is mechanical, not emotional.
Checklist before pulling the trigger:
Can you define your invalidation? (Not just price but behaviour)
Is there liquidity at this level?
Catalyst proximity - Is there binary risk (earnings, macro print) in 24 hours?
Setup maturity - Are you early, in the meat, or late?
Conviction? I score 0-5
You're not trying to snipe the exact bottom. You're trying to enter where price confirms your thesis, and you can control risk as entry without a risk plan is just a bet with better font.
II. Sizing: Where 90% of Participants Blow Up
Let's kill a myth: there is no such thing as a "conviction size" trade unless you've already proven the trade is working.
Institutional sizing is systematic, probabilistic, and adaptive:
Starter size = uncertainty premium
Add on confirmation = conviction earned
Let's say your max size on a name is 5% of NAV:
Starter = 1% on range reclaim
Add = another 1-2% on volume expansion
Final 2% = only if macro/theme lines up and the tape accelerates
You scale into information, not hope.
III. Scaling
Professionals aren't hoping their position works, they're building into it.
You don't need to go full size on Day 1 - that can depend on the vol regime:
You scale when volatility contracts
You press when volatility expands
Think like this:
Flat → Small → Working → Add
Full → Extended → Trim
Unclear → Don't touch it
Most traders blow up because they scale into price instead of into information.
This game is about stacking edge. Entry gets you in the game. Sizing keeps you playing and scaling is how you get paid.
Every portfolio manager I respect has different setups. But they all size with respect. They all add based on confirmation. And none of them double down just because a red candle appeared.
Let's get more tactical now. Next section, I’ll talk about execution: entries in illiquid names, how to use options as expression tools, and how to size volatility instead of price.
Execution and Expression
Because a good idea poorly expressed is just a future regret.
Execution is where most traders unconsciously leak edge. It’s not just about whether you’re right, it’s about how you get into the trade, how you size it, and how you express it, given the structure of the name and the environment around it.
I. Execution in Illiquid or Thin Names
In real-world trading, liquidity isn't a detail - it's a constraint. Especially for PMs running size.
You don't just fire a 3% position into a low-ADV name. You work it.
Rules some would follow internally:
Liquidity filter: No more than 20–30% of a name's 20-day ADV per day, and even that's aggressive unless it's a clean event-driven play
Time of day matters: Open and close = worst slippage. Midday is dead but useful for quiet adds
Use conditional orders: Don't just sit on the bid. Step into momentum when the market confirms, especially after reclaim levels
Work the book: If you're running size, stagger orders across levels or at VWAP not all-in at one price. Don't be the liquidity…
If you're running a small book, this might sound overkill. But the point remains: treat your execution like you're managing a real book, even if it's five figures. That habit will pay dividends later.
II. Use Options to Express Asymmetry - Not Lottery Tickets! (Though the odd Friday SPX 0DTE is ok)
Options aren't magic. But they're often the cleanest way to:
Express directional views around catalysts
Define risk in binary environments
Play volatility instead of price
If you're trading around earnings, macro events, or headline risk, the question isn't "should I buy the stock?" but "is long vol or short vol the better expression?"
Examples:
You want upside, but hate the tape? Call spreads give you defined exposure with limited capital bleed
Expect a sharp move, but unclear direction? Straddles or strangles (if priced reasonably) offer vol plays
Stock is extended but crowded? Look to sell premium (via spreads or calls) if you're positioned for mean reversion
You're not buying options because the chart looks spicy. You're using them to control exposure, capital at risk, and payoff shape.
My personal filters for using options over equity:
Illiquid underlyings with clean option chains (and relatively tight spreads)
Macro or earnings risk within 3–5 days
Crowd positioning is clear, and I want to fade it without unlimited downside
I need more time for a narrative to work than I'm willing to bleed on stock
If you don't know what your max loss is before entering the trade, you're not trading options, you're gambling with better marketing.
III. Size Volatility, Not Price Targets
Most retail sizing decisions look like this: "It's a $50 stock. I'll buy 100 shares. That's $5,000. Sounds about right."
That's not sizing
You need to size relative to expected volatility, not nominal price. I size trades based on what the expected move is, and how much of that move we want to capture without being blown out on noise. (Sure, conviction too)
Simple rule of thumb: Your dollar risk = volatility-adjusted stop distance × position size.
If you're risking 2% on a trade, and your stop is 5 ATRs wide (which is reasonable in high-vol names), you better size down accordingly.
Trading Nvidia on CPI day and trading Procter & Gamble in August are not the same sport. One moves 8% on headlines. The other barely flinches.
Practical tools:
Use implied moves from short-dated straddles into events
Build your stop zones around where structure breaks, not just a fixed percentage
Bottom line: Execution isn't about getting in fast. It's about getting in well - with clarity on risk, intent behind sizing, and a vehicle that matches the conditions you're playing in.,
Managing the Trade (Stops, Profit-Taking, and Letting It Run)
I. Stops: Where the Thesis Fails, Not Where You Get Uncomfortable
A proper stop isn't just a percentage or a moving average. It's where your idea stops making sense.
You're not placing stops to protect your ego. You're placing them to control path risk, the risk that your trade plays out, but takes you out first.
Ask yourself before entering:
"Where would this trade be structurally invalid?"
"What would the best participants not let happen here?"
"If this fails, where does liquidity likely vacuum?"
Examples:
A breakout that can't hold above a key prior high = structural fail
A reclaim that gets reversed on volume = no longer your trade
A low-volume drift down turns into high-volume rejection = time to go
And remember: If the stop feels too wide to size properly, cut size, not the stop.
II. Profit-Taking: Systematic, Not Emotional
Most people either:
Cut too early because they're afraid to lose paper gains
Never sell because they need the market to validate them
Both kill compounding.
There's no one-size-fits-all here, but here's a framework:
Trim into strength when the trade becomes consensus or parabolic
Hold the core if the structure is still intact
Exit entirely if the reason for being in the trade is gone
Try thinking in decision zones, not targets. When your trade hits 1.5x–2x your initial risk, start managing, not exiting.
This is key - the goal isn't to top-tick. The goal is to extract value while staying exposed to upside.
III. Letting It Run - Something I Mastered A Long Time Ago
This is what separates high sharpe traders from the ones grinding out mediocrity.
Letting a trade run is hard because:
You want to "book the win"
You fear the reversal
You didn't size it properly to allow breathing room
Here's what helps:
Trail structure, not price
Let volatility contract
Tune out the P&L
The best trades rarely feel euphoric. They feel more obvious after they've paid you.
Bottom line:
Stops should be mechanical, not emotional
Profit-taking should reduce exposure, not conviction
Letting winners run is where you actually get paid
Portfolio Construction and Cross-Position Flows
Most traders think in trades. Professionals think in books.
It's not about your best idea. It's about how that idea interacts with the other 10–20 positions you're holding, the factor exposures it introduces, and what your book becomes under stress.
This section is about managing that higher layer: The structure of your risk, and the flows that connect it.
I. Net Exposure vs. Gross Exposure: Know Your True Risk
You have seen me recently talk how gross has come down but nets have barely budged higher… I get asked so much what it means so here.
Gross is total capital deployed - long + short. Net is directional exposure - long minus short.
Why does this matter?
Because in a low-vol regime, you can run 150% gross and feel nothing. But when the VIX spikes from 13 to 23 in 24 hours, gross suddenly becomes pain.
Example:
Long 80%
Short 30%
Net = +50%
Gross = 110%
You might think you're "balanced." But if those longs are all beta > 1.5 and the shorts are slow banks, your book is lying to you.
Net exposure tells you where your P&L will move. Gross exposure tells you how fast it can move.
II. Correlation Is the Real Risk
You're not diversified if everything reacts to the same driver.
Most traders have portfolios that are 8 tech stocks with different tickers. Or 5 short names that are all high beta, high short interest, and get squeezed together on CPI day.
What looks like diversification becomes concentration under stress.
Ask yourself:
If a macro shock hits, how many of my names will move the same way?
How many trades are really just expressions of "tech up" or "rates down"?
Is my short book actually a hedge, or just another beta tail?
Sometimes the best hedge isn't another short, it's cash.
III. Sector Buckets and Flow Spillover
Flows rarely stop at one ticker.
If money floods into NVDA, it usually pulls AMD, AVGO, SMCI, and even TSM with it. If META breaks, the whole ad complex starts to wobble - think SNAP, PINS, even GOOG.
Build awareness of sector flow clusters - don't overweight the same theme without intention.
It's okay to cluster, if it's your edge. But don't do it by accident.
And remember this flows cascade. The leader moves first. The beta catches up later. That applies on the way up… and… on the way down.
IV. Conviction vs. Optionality vs. Risk Off
Every position in your book should serve a role:
Conviction Core: Highest weighting, full process alignment. You've done the work. You size it.
Tactical Trades: Lower weight, short horizon, structure-dependent.
Exploratory Probes: Tests, toe-dips, early-stage ideas.
Risk Off Hedges: Sometimes names, sometimes cash, sometimes puts. The only rule: they should actually help if things break.
If everything in your book is a 2–3% weight… You don't have a strategy. You have a smoothie.
V. The Book Under Stress: Can You Function?
When the market turns, everything compresses. Liquidity, spreads, and brain function.
Ask yourself now, before that inevitable day comes:
What names have to go if the tape flips?
What positions earn the right to stay on?
Where am I secretly long the same factor across 4 tickers?
Portfolio construction is a dynamic exercise, not a spreadsheet exercise.
The best PMs don't just manage ideas. They manage interaction. They know how their book breathes, in calm and in chaos.
Mistakes I Still See Professionals Make
Edge isn't about avoiding mistakes. It's about eliminating the repeatable ones.
You'd think that after running capital for years, the big errors would fade. They don't. They just get more expensive.
Here's what I still see, in PMs, traders, even desks with $100mm+ books.
I. Overconfidence in Thesis, Underconfidence in Price
They did the work, built the model, yet when price disagrees, they freeze.
But here's the rule: the market doesn't care what you think.
Price leads. The thesis confirms or it gets revised. If a trade isn't acting the way it should, that is information. And you either respect it, or just become a bagholder with a better vocabulary.
II. Scaling When It Hurts, Trimming When It Works
The most common professional version of FOMO is this:
"I can't believe I didn't have enough size. It's working. I'll add more."
But they add too late, just before the move stalls.
And then they trim when it finally starts paying… because the P&L feels big.
Scaling should reflect confirmation, not regret. Exiting should reflect conditions, not comfort.
III. Ignoring Liquidity on the Way Out
Anyone can build a position. Not everyone can unwind one cleanly.
I've seen seasoned PMs average into illiquid longs, only to discover they are the float. Then earnings disappoint, vol spikes, and their exit triggers a 5% air pocket.
Always model liquidity into your exit. Not just "what I want to do" but "what the market can absorb."
IV. Overhedging Until They're Just Paying Vega
The temptation to hedge everything is strong, especially in high-vol regimes.
But here's the truth: most hedges are just long vol donations.
Buying SPX puts on a 3% net long book
Hedging tech with utilities that have 0.1 beta
Carrying 5% of capital in puts that decay 20% per month
Hedges are tools. Not pacifiers.
The best hedge is usually one of these (or a few):
Size down
Get flatter
Cut correlation
Add optionality when vol is mispriced, not because you're nervous
V. Forgetting the Calendar
Pros still mismanage the obvious.
Holding crowded longs into CPI prints. Leaving size on into quad witching. Swinging for earnings while managing other people's money.
"I didn't realize NFP was tomorrow." Guilty as charged.
Don't let macro events surprise you. You don't need to predict them. You just need to not be caught leaning the wrong way.
VI. Not Having a Process for Exits
Even good traders still do this:
Have a beautiful entry
Manage the position well
Then puke it out the moment vol spikes
They had a plan for risk, but none for reward.
If you don't define exit zones, you will sell at the worst moments. Not because you're dumb, but because your brain's built for survival, not discipline.
VII. Taking Breaks Too Late
The best PMs know when to pull themselves off the field.
After 3–4 red trades in a row? Reduce risk, trade lighter or even just step back and watch.
But so many professionals wait until the drawdown is painful. Until their confidence is low, and decision-making is reactive.
Reset before the damage compounds and not after.
Bottom line:
Being a pro doesn't mean perfection. It means building a system that keeps you from compounding small mistakes into catastrophic ones.
When your process has fewer leaks than theirs, you don't need better ideas. You just need to survive longer and let the numbers do the rest.
The Mental Game
At some point, everyone involved with markets figures out the truth which is that your biggest risk isn't the market. It's you on a bad day, with size on.
Edge can be destroyed in an hour of ego. Confidence can be shattered in a week of poor execution. And no backtest survives the psychological war that begins the moment you're in a drawdown.
I have already written a post on Drawdown Psychology.
I. Tilt Doesn't Start With Rage - It Starts With Subtle Slippage
Tilt isn't always dramatic.
It often starts small:
You skip a mental checklist
You add size on a whim
You trade something "just to stay active"
These are not execution errors, they're emotional leakage.
The pros that last are the ones who catch themselves early. They see the change in tone, the impulse to "make something happen," and they know that's not flow… that's ego.
II. The Slippery Slope of One Good Trade Gone Wrong
Everyone has had it… You get a good setup. It starts to work. You add.
Then a headline hits or your read just isn't right.
You give it room. Then you give it more. Then suddenly, your "best trade of the month" is your worst drawdown of the quarter.
This isn't about stops, it's about identity drift.
Good traders lose money. But they don't lose their process.
III. Anchoring to P&L is the Death Spiral
Your process doesn't get better when your P&L is up. And it doesn't stop working just because your screen is red.
But if you anchor your decision-making to your daily mark, you start defending past choices instead of adapting to what's in front of you.
The tape owes you nothing. And it doesn't care how well you traded yesterday.
Detach and review at the end of the day. But don't trade to repair a number. Trade to execute your strategy.
IV. Identity: You Are Not Your P&L
This is the one most professionals learn too late:
If your self-worth is tied to your performance, your process will suffer every time your P&L does.
The best traders I know are detached. Not cold, just centred. They love the game. But they don't need the market to validate them.
Your job is not to win today. Your job is to be sharp enough to win over time.
V. Resets Are a Skill
Know your red flags:
You're trading bigger after a loss
You're justifying size with "it'll bounce"
You're changing your stop because you "believe"
When that happens, reset:
Cut size
Cut gross
Take 24 hours
Review without judgment
If you wait until you're in a tailspin, it's already too late.
VI. No System Survives Without Psychological Maintenance
Backtests don't account for:
Being tired
Fighting with your partner
Being down 8% YTD
Watching peers talk about monster trades
Feeling like you're missing everything
All of that is real. And none of it shows up in a Sharpe ratio.
The pros who last aren't always smarter. They're just more consistent under stress. They have rules for themselves, not just their trades.
Final thought:
Markets will test your process. But more than that, they'll test who you are as a person. If you don't have a psychological risk framework, you don't have a complete strategy.
Keep your edge sharp and your mind sharper.
Volatility Environment Playbook
Volatility isn’t noise, it’s the regime, and your strategy should flex to meet it.
Most retail traders treat a low-vol melt-up the same as a high-vol flush. Churn.
Low Volatility Environments (VIX < 15)
Setups take longer to develop
Breakouts grind
False moves are more common, and range-bound price action frustrates trend followers.
Position sizing can increase slightly due to narrower expected ranges.
Options premium is cheaper, so long vol can make sense if you expect regime change.
Best tactics:
Trade less
Hold longer
Use wider stops in percentage, but tighter in volatility-adjusted terms.
Be patient with scaling, there’s no rush, trends develop slowly.
Moderate Volatility (VIX 15–22)
This is where most of the best risk-reward lives.
Price respects structure
Catalysts matter, but don’t fully dominate.
Liquidity is sufficient, and spreads are manageable.
Best tactics:
This is business as usual for most discretionary traders.
Focus on clean setups with structure and narrative.
Sizing should align with your base framework.
High Volatility (VIX > 23+)
Now it’s a different game.
Liquidity thins out, spreads widen and slippage spikes.
Correlations go to 1, diversification vanishes.
Strong names sell off anyway and everything is beta.
Best tactics:
Cut gross, cut net
Trade smaller.
Intraday trading edges > swing.
If you must hold overnight, consider hedging with index puts or vol products.
Volatility isn’t to be feared, it’s to be respected. Some of the best trades come out of chaos.
Building Your Playbook
If you want to get serious then trade like you’re running a real book.
Your edge isn’t just in the setup, it’s in the process around it.
Here’s how to systematise your discretionary trading into something scalable:
I. Categorise Your Setups
You don’t need 20. You need 3-5 that you understand inside out.
Narrative-driven trend
Event-driven volatility
Mean reversion
Positioning setups
Give each one a name, a checklist, and sizing rules.
II. Assign Playbooks by Volatility Regime
Low vol = longer holds, tighter risk. High vol = shorter duration, faster exits.
Each setup should have notes on:
Entry criteria
Risk model
Vol-adjusted sizing
Conditions where it fails
III. Track With Intent
Start a basic trade journal that tracks:
Setup type
Conviction score
Entry reason
Outcome vs. expectation
Patterns will emerge. You’ll see what you’re actually good at.
IV. Run a Real Book, Even With Small Capital
Start thinking like a PM:
Know your gross and net exposure
Monitor sector exposure
Log rolling beta
Track cash percentage
Scenario Analysis
If you treat your $25k book like it’s $25m, you’ll build the habits now that scale later.
V. Keep Refining
Your playbook isn’t static. Prune the dead setups and double down on what works.
This is how you build edge: Discover what pays you, size it appropriately and cut what bleeds you. A proven playbook turns market noise into actionable intelligence. It's what makes you dangerous instead of desperate.
You’ll never be done building; your edge will always be in refinement. Do less dumb stuff, more consistently.
Fed
PS - If you found value here, smash the like and restack. It helps others find this stuff instead of the usual online guru nonsense.
This is more than valuable to be free.
Amazing detail and lots of knowledge packed into this post. Thanks Fed!