Why Process Beats Setups in Trading | Pradeep Bonde

Key Concepts

• Process Orientation: The core philosophy that profit is an outcome of following a well-defined and effective trading process.
• Setups: Predefined trading opportunities categorized into "home run" (large profit potential) and "singles" (smaller profit potential).
• Catalyst-Driven Trading: Focusing on events like earnings, news, or large orders as triggers for trades.
• Breakout Scans: Automated tools to identify stocks that are breaking through resistance or support levels.
• Anticipation Setups: Identifying stocks likely to break out in the future, often by looking for consolidation patterns.
• Delayed Reaction EP (Episodic Pivot): A strategy to enter trades after an initial catalyst has occurred, the stock has consolidated, and then shows signs of resuming its move.
• Situational Awareness: Understanding the current market environment to determine the probability of success for different trading strategies.
• 20% Study: A methodology to analyze stocks that have moved 20% in five days to identify patterns, sector trends, and capitalization characteristics.
• Deep Dive: In-depth research into specific stocks or setups to understand the underlying drivers of their moves.
• Process Iteration and Simplification: Continuously refining and simplifying trading processes for effectiveness and ease of execution.
• Timeframe Decision: Choosing between day trading, swing trading, or position trading as a foundational step in process development.

Process-Oriented Trading Philosophy

The central tenet of the presented trading methodology is that profit is an outcome of following a good process. The speaker, Pradeep Bond, emphasizes that once a trader has a robust setup and a defined process, consistent profits naturally follow. This philosophy is applied across various trading strategies, including breakout trading and anticipation setups.

Setups: Home Runs vs. Singles

Pradeep Bond categorizes trading setups into two broad types:

• Home Run Setups: Aim to significantly move an account in a single trade, potentially by 20%, 50%, or even over 100% of the capital allocated to that trade. Examples include the Episodic Pivot (EP) and its variation, EP 9 million.
• Singles Setups: Aim for smaller, more frequent gains, typically ranging from 0.5% to 5% of overall capital per trade.

Catalyst-Driven Trade Identification Process

A significant portion of the trading process focuses on identifying stocks with catalysts, primarily through pre-market and after-market analysis.

Pre-Market and After-Market Analysis Steps:

1. Earnings and News Monitoring: The process begins by looking for companies announcing earnings or significant news after market close or before market open.
2. Tab Groups and Tools: A dedicated set of browser tabs is used for efficient information gathering. Key websites include:
   • Briefings
   • The Fly
   • Wall Street Journal
   • Morningstar
   • MarketSmith
   • Perplexity Finance (AI tool for research)
3. Earnings Surprise Focus: The primary focus is on earnings announcements that show a "surprise," meaning they beat analyst expectations for earnings per share (EPS) or revenue. A specific metric of interest is year-over-year revenue growth exceeding 39%.
4. Historical Data Review: The speaker reviews historical earnings data to identify patterns of high sales growth and surprises.
5. News and Chart Analysis: Upon identifying a potential candidate, the speaker reviews the news item to understand the catalyst. Crucially, they check if the stock was already rallying into earnings. If it wasn't, there's a higher probability of a positive reaction.
6. Fundamental "X-ray": A deeper dive into the company's fundamentals is conducted, looking for projected growth rates. While 9-10% growth might be considered good for a retail stock, the speaker gets more excited by growth rates of 39-50%+.
7. Valuation Analysis (Morningstar): Morningstar is used to assess the stock's valuation. A stock trading at a significant premium to its fair value might limit the upside potential, even with a positive catalyst.
8. Sales Growth and Ownership Trends: Specific attention is paid to sales growth (context-specific to the sector) and any sudden surges in mutual fund ownership, which can indicate institutional interest.
9. AI Tool Integration (Perplexity Finance): AI tools are used to summarize analyst opinions, bullish cases, and earnings call transcripts, saving time compared to reading lengthy SEC filings.

Example: KC's General Earnings

The speaker uses KC's General as an example. The company beat EPS by 68 cents, beat revenue, provided a positive outlook, and increased its dividend. The stock had not rallied into earnings and had a significant reaction (16%) on its last earnings report. The speaker notes that the stock has been "neglected" for at least a month, suggesting the move could be more explosive.

Delayed Reaction EP Process

This process focuses on identifying stocks that had a significant catalyst (like earnings) but may not have immediately moved or have faded after an initial gap up, offering a delayed entry opportunity.

Steps:

1. Scan for Big Volume Moves: The process involves scanning for stocks that have had significant volume moves in the last 25 days. A "good catalyst" is defined as a move of more than 4% on 9 million shares traded.
2. Create Watchlist: Stocks meeting these criteria are added to a watchlist for potential delayed entries.
3. Analyze Consolidation: The speaker looks for stocks that have consolidated or set up after the initial catalyst.
4. Example: CCJ: CCJ is cited as an example where a catalyst (earnings) occurred three days prior, leading to a significant volume increase (68 million shares traded on a float of 249 million). The stock then consolidated, setting up for a potential delayed entry.
5. Example: CRDO and ELF: These stocks are also mentioned as potential delayed reaction candidates after fading on their earnings days.
6. Example: APLD: A large order (15 billion) served as a catalyst for APLD, leading to a significant volume increase (more than its float traded). While a delayed reaction was hoped for, sometimes immediate entry is necessary due to the lack of a clear consolidation period.
7. Catalyst Documentation: The speaker emphasizes documenting the catalyst for each stock on the watchlist (e.g., "earnings," "tie-up with NVO") to avoid having to recall it later.

Breakout and Anticipation Processes

These processes are used for identifying immediate trading opportunities and planning for future trades.

Breakout Process (Reactive):

1. Market Open Scans: As soon as the market opens, two color-coded breakout scans (green for bullish, red for bearish) are run.
2. Trade Ideas Software: Additional breakout variation scans are run simultaneously using Trade Ideas software.
3. On-the-Fly Entry: This is a reactive process where trades are entered as soon as a stock appears in the scan, without prior watchlist inclusion.
4. Example: Tesla and Fastly: Tesla is mentioned as a trade taken from a scan where it opened lower but then showed buying interest. Fastly is another example of a stock entered directly from a scan.

Anticipation Process (Proactive):

1. Afternoon Scan (3 PM): This process runs primarily in the afternoon, around 3 PM, to identify setups for the next day.
2. Bullish Anticipation Scan: The scan looks for stocks with momentum that have moved less than 4% (indicating a narrow range or consolidation).
3. Tight Range Focus: The speaker prioritizes stocks with the lowest "net change" (indicating tighter candles or sideways movement).
4. "TTT" (Three Tight Days) or "2T" (Two Tight Days): The ideal anticipation setup involves two or three consecutive days of tight trading ranges.
5. Process Hack: Pre-Market Close Entry: A key innovation is entering anticipation candidates between 3:58 PM and 4:00 PM, just before market close, rather than waiting for the next morning. This frees up morning time for breakout scans and reduces the risk of anticipation setups deteriorating.
6. Example: CCG: CCG is cited as an anticipation setup that was also a breakout candidate.
7. Example: DTOR: DTOR is presented as a stock that became an anticipation setup after two tight days.

Situational Awareness Process

This process helps determine the overall market environment and its impact on trading strategies.

Steps:

1. Morning Question: The core question is: "Are breakouts likely to work for the next 3 to 5 days?"
2. Market Monitor: This tool indicates money flow into or out of the market. Buying pressure suggests breakouts are more likely to work.
3. 20% Study (on SPY): This study, available in TC2000 Platinum, plots the number of stocks in the universe that have moved up 20% in the last five days.
   • Interpretation: Extreme readings (above 100) suggest a potential pullback, while readings below 20 indicate bullishness.
4. Trade Follow-Through: If three consecutive trades fail to follow through, it signals a problem in the market environment.
5. Decision Making:
   • Yes (Breakouts Likely): Load up on breakouts.
   • Maybe (Selective Breakouts): Be more selective, focusing on catalyst-driven or high-quality setups, and reduce exposure.
   • No (Breakouts Not Working): Do not trade breakouts.
6. "Find and Enter Early" vs. "Waiting": The speaker observes that in the current market, waiting until around 10:00-11:00 AM is often better than entering breakouts immediately at the open, as early entries can lead to stops being hit before the stock moves higher.
7. Intraday Tools: Monitoring the number of new highs and new lows per second helps in adjusting stops or taking profits early if significant selling pressure is detected.

20% Study for Pattern Recognition

This is a daily process to train the eyes and build visual memory for identifying potential setups.

Steps:

1. Daily 20-Minute Study: Every day, the speaker spends 20 minutes reviewing stocks that have made a 20% move in the last five days.
2. Analysis of Characteristics: The study focuses on:
   • Starting Point: Where the move began.
   • Catalyst Identification: What signal would have led to entry.
   • Capitalization: A significant finding is that 90-95% of these stocks have a market capitalization below $10 billion.
   • Price: Most stocks making these moves are priced below $20.
   • Sector: Technology, healthcare (biotechnology), and consumer discretionary sectors dominate these lists.
3. Bearish Study: A similar study is conducted for bearish moves.
4. Dollar Move Study: An additional study tracks stocks that have made a $20 move in five days.
5. Weekend Study (50% Move in 2 Months): On weekends, the speaker reviews stocks that have made 50%+ moves in the last two months to identify longer-term patterns.
6. Output for Setup Development: The learnings from these studies directly inform the development of new setups, such as EP 9 million and "weak structure shot."

Deep Dive Process for Intuition Building

This process involves in-depth research with a specific objective to build intuition and pattern recognition.

Steps:

1. Define Hypothesis/Objective: A deep dive must have a clear question or problem to solve. For example, "What catalysts make a stock go up 50%?"
2. Analyze Specific Stocks: The speaker examines stocks like Dolingo, GEV, and Wingstop to identify their catalysts (earnings, sales, etc.).
3. Categorize Catalysts: Catalysts are categorized into "real" (earnings, sales) and "story-based" (e.g., crypto treasury launch, space travel).
4. Compare Move Magnitudes: The speaker observes that "story catalyst" stocks can sometimes make larger moves than those with "real earnings" catalysts, questioning the focus on traditional fundamentals.
5. Magnitude vs. Duration: A key discovery is that significant moves (e.g., 300%) often occur in short periods (less than two months), influencing stop-loss strategies.
6. Long-Term Persistence Study: The speaker also studies stocks that have performed positively for many consecutive years (e.g., O'Reilly, Eolab) to understand the underlying criteria for sustained growth.

Daily Trading Schedule and Process Integration

The speaker outlines a structured daily routine that integrates various processes.

• 8:00 AM: Arrive at the office.
• 8:00 AM - 8:15 AM: Run the 20% Study for situational awareness and to understand working sectors.
• 8:15 AM - 8:35 AM: NTRT (Earnings and News Plays) Process: Research earnings released overnight or that morning, and identify gapping stocks. This is a continuous loop.
• 8:35 AM - 8:45 AM: Visualization: Mentally prepare for the trading day by visualizing market scenarios and trading actions.
• 8:45 AM - 9:20 AM: Prepare and place OPG (Opening Price Guarantee) or Market on Open orders for any identified earnings plays.
• 9:30 AM (Market Open):
  • Enter delayed reaction setups or breakouts.
  • By 10:00 AM - 10:30 AM, trading is typically complete for the morning session.
• Mid-day: Gym and exercise.
• 2:00 PM: Begin the second trading cycle. This may involve entering more breakouts or slower-moving "dollar breakouts."
• 3:00 PM: Start running anticipation scans and reversal (pullback) scans.
• 3:58 PM: Enter anticipation candidates with pre-placed orders.
• End of Day: The cycle repeats the next day.

General Advice for Traders

• Timeframe Decision: First, decide on a trading timeframe (day trader, swing trader, hybrid, position trader). This decision opens up specific paths and strategies.
• Setup Research: Once a timeframe is chosen, research and backtest potential setups.
• Process Development: For any chosen setup, develop a step-by-step process that includes:
  • Identifying candidates (scans, real-time analysis).
  • Researching candidates (fundamental data, news, dilution trackers for small caps).
  • Determining entry and exit levels.
  • Pre-borrowing short positions if applicable.
  • Defining stop-loss strategies and contingency plans for halts.
• Iteration and Simplification: Trading processes are rarely perfect on the first attempt. Continuously iterate and simplify them. The first 30 processes developed are often "junk."
• Avoid Tool Distraction: Be wary of constantly switching tools. Focus on mastering a few effective tools.
• Freeze the Process: Once a process is refined and works, freeze it unless there's a compelling reason to change.
• Develop One Process at a Time: Master one process and setup completely before thinking about adding others.
• Find What Works for You: Ultimately, success comes from finding a process that aligns with your trading style and personality. Setups are widely available; the differentiator is the developed process.

Contact and Resources

• Twitter: A primary contact point for the speaker.
• YouTube: The speaker's YouTube channel.
• Blog: Stockby.com.
• Membership: An option for more in-depth engagement.
• Email/DM: The speaker aims to answer all inquiries within a week, even from non-members.
• Trailine Conference: Resources from the conference, including the Episodic Pivot masterclass, can be found on troline.com.