Growing your account over the long haul.
For a profession that advocates stoicism, last week was certainly a roller-coaster ride. Here're my thoughts on how to find order in chaos:
First of all, respect fear. Fear is often talked about as a negative trait in trading; in reality, fear protects us. As last week proved, events that lie outside the normal probability distribution curve are improbable, not impossible. The collapse of LTCM spectacularly showed that neither genius nor size can necessarily survive anomalies. Defense really is the best offense, and capital preservation needs to take priority at all times.
Of course, all trading is risky by its very nature. Taking a cue from Donald Rumsfeld, I have broadly divided trading risks into 2 categories: Unknown-unknowns and known-unknowns.
Unknown-unknowns: No one can really mitigate the unknown-unknown kind of trading risk. Last Friday's RTC news and the ban on financial shorting were unknown-unknowns. There was simply no way to anticipate an outlier event like that - unless you had access to tomorrow's Wall Street Journal today.
Trying to trade based on unknown-unknowns is a pure gamble, without all the fun of Vegas.
Known-Unknowns: There are several known-unknowns in trading. For instance, we know about the earnings and conference dates, short-interest, new product introduction dates, etc.
Those can be accounted for while making buying and selling decisions. Also, the known-unknowns can be greatly reduced by disciplined investing, such as careful position sizing, stop-losses, diversification and careful adherence to those personal rules.
That brings me to my most important trading tenet: Consistently grow your account.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter