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Slow And Steady Protects Your Capital


Averaging in reduces your risk.


From the most recent peak on May 23rd, the S&P has now corrected 8.6%. The NASDAQ has fallen 6.3% and by all accounts things are starting to look a bit oversold. As I go through my watch lists and consider my actions, the one word that keeps ringing in my ears is "patience."

I've been down this road before and the story is always the same in that a trend, be it long or short, can always last longer than one can expect. It is the anticipators who fall victim to the allure of lower prices, only to see them head lower and become even more of a bargain.

I've always instructed individual traders to remain obscenely patient, actually giving up the first move in order to remain safe, choosing to protect capital rather than be nicked to death as the anticipatory turn buying is proven wrong time and again.

The thought is that once a turn is actually confirmed, the individual trader can use his speed and flexibility to pursue the best stocks, riding them to great profits, while those who have sat through the gyrations are simply taken back to even. Add a touch of beta, repeat often, and you have a nice recipe for longer term success.

As my assets under management have grown, however, I've found it quite hard to move at speeds I once did and have had to evolve my trading quite a bit. No, I still don't over-anticipate, buying stocks I think will catch momentum and are near a turn. Rather, I start to wade back into the market using ETF's.

My theory is simple: If I move slow and start to build a position methodically when I feel a turn is coming, I can participate once the turn arrives while only being subject to the beta of the general market, rather than higher momentum stocks.

It's a tough balance to strike, but I've found that it works quite well for me. I protect during extremes and when the blood starts to show up on the streets I start to wade back in, using a methodical and balanced ETF approach.

Today, I have started to average into some SSO and QLD, the leveraged longs. My goal is simple: I have broken my buys into three parts, making the first purchase today. If we do not turn soon, i.e. my timing is not perfect (it rarely is), I'll move forward with the second purchase in the next day or so. When we reach extremes, or the ultimate capitulation, I will hold my nose and move in with the third purchase.

We're oversold, which doesn't mean we can't become more oversold, but it's a risk I'm willing to take in order to start wading back in to participate during the next reflex rally.

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Position in SSO, QLD.

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