Margin of Safety and Trading

MoS and trading have a somewhat funny relationship.

When MoS is offered, you don’t feel like looking at your trading portfolio.

Why?

Because it is bleeding?

Maybe.

Actually, you are in a hurry to clock some long-term investments. After all, there’s MoS on the table. Yes, you’d much rather occupy yourself with your long-term portfolio.

With serious MoS in the pipeline, the market makes it easier for you. It bludgeons your trading portfolio, such that you sheer exit it, and now you are free to focus solely on your long-term investing portfolio.

Fine. Great. Is that it?

There’s a tad more to the connection between MoS and trading.

What is trading?

Buying high, and selling higher? Selling low, and buying back lower? Yes, that’s trading.

On first instinct, you’d buy on a high, or sell on a low, that’s what you’d think.

However, on the ground, margin of safety makes itself felt.

Players wait for the underlying to correct a bit, or rally a bit, and then pick it up, or sell it. They’re not picking it up on the fresh high, with no resistance opposing them. They are taking a chance, that there will be a correcting move, and that’s when they will pick it up. Vice-versa for the bears.

Those few extra buck of fall will add to their profits when the underlying starts to rise again and makes new highs. Expressed for the bears, those few extra bucks of rise will add to their profits when the underlying starts to fall again and makes new lows.

The pay-off is, that this doesn’t always work. The trader might miss the trade altogether, if the correcting or rallying move does not take place, and the underlying zooms (falls) to make one high (low) after another.

So when does waiting for MoS actually work in trading?

Almost always. Except…

…when it’s a full-blown bull or bear run.

This means that it works like 90% of the time, which is a pretty high number.

Does that make you want to adopt MoS full-time while trading too?

Of course it does.

How do you still make use of the opposite strategy – buying upon highs, or selling upon lows?

You let a few setups go amiss. Missing a couple of trades due to bull or bear runs is the signal.

Now you can switch to buying on fresh highs or selling on fresh lows.

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Dealing from a Position of Weakness 

When you’re losing… 

… you downsize your position. 

Why? 

To save your corpus. 

You lower the risk. 

Is risk quantifiable? 

You bet. 

Risk is no abstract entity without a body. 

In a trade, your risk is defined by your stop to stack-size ratio and the size of your one position. 

When you’re losing, you either lower the magnitude of your stop, or lower the quantity of your one position. 

Till when?

Till your corpus crosses par and then some. 

At par, you trade normal. 

Normal stop. 

Normal quantity. 

What is normal? 

Depends on you. 

What is normal for you? 

That’s what goes. 

Why the caution when below par? 

Lots works against you at this time. 

Sheer math for example. Downsizing sets this right. 

Emotions. 

Whoever’s got a remedy for those is king already. 

You. 

Your body-chemistry is affected. You’re sluggish. More prone to error. Nobody’s got a remedy for you, except you. Wait for your body to heal before trying out that perfect cover-drive, or what have you. 

Winning or losing in the markets depends a lot upon psychology, chronology, systems, strategy, application and adaptation of style. 

I like to call this “getting one’s meta-game together”. 

Let’s go people. 

Let’s get our meta-games together. 

Then we can scale it up. 

🙂