Everyone said my timing was perfect. They were wrong

A trade I closed this week made 30% in two days.

The emails started coming in. Four of them so far. Your timing was phenomenal. Your timing was excellent. Nice call, Don.

They are all wrong, and I want to tell you why, because the reason matters more than the trade.

It didn't have anything to do with the damn timing.

The trade was in XLV, the exchange-traded fund that tracks the healthcare sector. It had been cracking through its expected move for weeks.

The expected move is the range the options market prices a thing to stay inside. When something blows past that range, over and over, that is not random. That is a signal.

XLV hit the upper edge of its expected move three weeks in a row. Three. That is the tell.

Not a hunch, not a feeling about healthcare, not a guess about where the sector was headed. A stock stretched to the top of its range for the third straight week.

So I stepped in the way of an absolute freight train to the upside. I put the trade on on the 7th, took it off on the 9th. Thirty percent, and done.

Now watch how easy it is to tell the wrong story about that. Timing. He nailed the top. What a call. That story feels good and teaches you nothing, because it is not true.

I did not predict the top. I found a setup where the probability was flipped in my favor, and I let the probability do the work.

There is a rule underneath this worth more than any single trade. When something is trading right up against an all-time high, or in this case near an extreme low, more often than not the move goes for it.

People throw in the towel at the edges. The last sellers puke it out, the last buyers pile in, and the thing overshoots.

That overshoot is what I was trading. Not the direction. Not the news. The overshoot.

I said it on camera. The exact expected move on that trade was $64, and I said I would take the over on that all day long.

Not because I am smart. Because the math was already there.

Most traders get this backwards. They think a good trade is a good prediction.

It is not. A good trade is a good setup, taken again and again, whether or not any single one works out.

It doesn't mean it's going to make money. The XLV trade could have gone the other way and I would have lost a little and moved on. But the probability was in my favor, and I will take that over just taking a shot and losing every time.

That is the difference between trading and gambling. The gambler takes a shot and hopes. The trader finds an edge and repeats it.

One has a story about timing. The other has a process.

So the next time a trade works and someone tells you the timing was perfect, ask a better question. Was it timing, or was it a setup with the odds already tilted?

You can not repeat timing. You can repeat a setup all day long.

If you want to learn about my next high conviction trade, check this out. 

To your success,

Don Kaufman