Five Questions to Ask Yourself Before Any Trade
Managing personal risk is critical.
Reality has a way of persisting despite our best attempts to wish it away. We don't complain, we don't worry, we don't hope; we do something concrete to adjust our new perception of reality.
I've been hearing from fellow Minyans about how difficult navigating this market has become lately. After all, the past 2 weeks have been very choppy with no apparent trend, and at the same time, many stocks in the commodity and metals area have suddenly come into vogue (and we caught some of those explosive moves here on the Buzz, such as US Steel (X), Patriot Coal (PCX), iShares Silver Trust (SLV), Pan American Silver (PAAS), Oil Services (OIH), and Arch Coal (ACI)). There have been a lot of seemingly counter-intuitive moves. For instance, Goldman Sachs (GS) didn't crack when the market went down. United States Natural Gas (UNG) rose from the ashes, was resurrected and is now caught in a gut-wrenching slide. Bank of America (BAC) announced a secondary and had a 10% swing even before the market opened, but then went higher.
Given that we've been witnessing incidents like this lately, are you feeling anxious and stressed? Loving this market? Packing up and ready to quit? How is it that something that's supposed to have no association with emotions, has only emotional adjectives associated with it?
Let me share something personal. The truth is, while I respect risk, I'm actually quite risk-averse in my regular life. But at the risk of making the traffic Gods angry, I must share that I've never been handed a traffic-violation ticket. Yep, that's my "risk-taker" profile!
The reality is that whether you're risk-loving or risk-averse, the market doesn't care. It doesn't owe any participant anything. It's up to us to manage risk, and hope to increase the reward by careful planning before and after a trade is initiated
I know many talk about whether fundamental analysis or technical analysis (or some other kind of analysis) is superior, but my personal experience has shown me that it's the art of money management -- the strategy of allocating risk to different components of your portfolio -- that enables success. Several questions need to be asked before any trade is placed. Here are a few:
1. How much of my portfolio should I allocate to any one stock? (No matter how good the story and how great the reward potential, remember we're playing probabilities, not certainty). I usually allocate a pre-fixed dollar amount to any one position.
2. How much of my portfolio is getting allocated to any one sector?
3. Am I compensating for volatility-adjusted positions? This implies allocating less than usual size to highly volatile stocks so you can have staying power.
4. What kind of stops am I going to employ? Is my personality suited for a mental/hard stop? Should I go for percentage/dollar loss? Is trailing stop going to work better for me when my position gets into profit?
5. Am I aware of my account details? What did I start with and where am I today? (I've seen 2 bull markets and 2 bear markets since I started trading full-time in 1995, and this is one question that I've found people have had no answer to. Most people don't want to know how much money they started out with, how much they've added, and where they stand today.) In my opinion, this is one of the most important questions.
There are many such considerations that no one has ever made us aware of. My objective here is to start you off on your own quest of self-inquiry, and spark those thoughts on personal risk assessment and management.
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