Handling a Long-Long Trading Portfolio During a Market Correction

You’re probably laughing at the use of the term “long-long”!

Hahahahaha, I laugh with you, 🙂 !

In India, we like to get our point across without caring too much for terminology, and / or how funny it may sound. 

What I mean is, and you’ve obviously gotten the drift, that the average trader is normally long in a trading portfolio.

Now, how is the trader to deal with his or her trading portfolio and its dwindling valuation during a long-drawn out market correction?

Sure, there are many options. 

One is to hold and sit it out. 

No good. 

This is not investing. This is trading. Trading means that once a stop is hit, you’re out. Period. 

Second option – bludgeon it. Cut the entire portfolio. 

Hmmmm, that’s not trading. 

Many stocks will not have their stops hit yet. Why are you cutting these? This would mean losing your position. What if the reversal starts right now? You did the right research, you entered, and now you’ve lost your position. 

Not good. 

We’re not bludgeoning it all. 

Of course we are continuing to cut those stocks whose stops are hit. 

No question about that. 

Now comes a kind of a “pointe”. 

You’ve hit a stop during the correction. You’ve gotten out of this stock, as per your trading rules. Look for another stock with a northwards chart that is not getting so affected by the correction, but has fallen a tad so as to allow margin of safety during trading entry. 

You’ve done three things here. 

You’ve entered a robust stock. 

Simultaneously, you’ve benefited from a slight price advantage. 

Thirdly, your trading portfolio is still going. Its contents are getting robust. Come the rally, and the robust contents are going to zoom. 

You’re trading on surplus. You’re not afraid to lose till your stop. You’re not afraid to reenter. So why cut it all? 

There’s no telling about turnarounds. 

However, when they happen, you are positioned. 

Optimal positioning while trading leads to big profits.

What’s the worst case scenario?

Stop after stop being hit, and eventually you being out of the whole portfolio?

Remember, the other side of the coin promises big profits, were the turnaround to happen now, with your portfolio full of robust stocks.

Are you willing to make the trade-off?

No?

Well, then don’t trade an entire portfolio. You’re better off trading one underlying, like an index derivative. Cut it when you like, no questions asked. 

Yes?

Well, then, what’re you waiting for? Make the trade-off. Go for it!

🙂

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Benefit from a Small Entry Quantum

You enter the markets with an amount each time. 

That’s your selected quantum. 

The idea that’s being discussed here is as follows. 

Enter the market as many times as you want. 

Just do one thing before that. 

Adjust your quantum level to a point where it doesn’t pinch you, and…

… such that any entry mistakes make themselves felt only minimally, seen from an overall perspective.

In other words, keep your quantum of entry small.

Also, keep it constant, so that overall errors and benefits are able to average out in the long run.

Let’s get some picturization into play, to elucidate the concept. 

Let us assume that you wish to buy stock X for the long term, and you’ve decided upon staggered entry, many times, with quantum Y each time. 

You enter with one quantum Y on day A in the morning. By late afternoon, you are disappointed to see that the price has moved 5% against you. Happens. You start wishing that you had waited till late afternoon for entry. This can be classified as a random entry error through no fault of yours. Such random “errors” keep happening all the time in the markets. Get used to them.

Because your quantum Y was small, your “error” was also small. That’s the point being made here. 

You are going to enter with quantum Y many times. Sometimes, immediately after entry, price might move in your favour. There might be lesser slippage. You might get a gap-down entry. You might enter after a big correction. Overall, whatever goes in your favour gets written off against all “errors”, such that in the long run, over many entries, the effect of errors is nullified. 

Well you got me there. Nullified, I say. Then you ask what the entry error minimalization talk was all about, when it would get nullified in the first place. 

Which is when I ask that what was it that would lead to nullification?

Many, many entries, right?

What has preserved your capital enough to last for those many, many entries?

A small entry quantum.

Also, psychologically, you know that your small quantum translates into a small potential entry error for you. So, your psyche is all geared up and raring to go. It is not afraid of entry, or of the error you might make upon wrong entry. 

To sum up, at first, a small quantum works in your favour because it causes lesser potential entry error, seen as an amount. 

Then, because your entry quantum is small, your capital lasts for many, many entries, which is when one can start speaking of entry error nullification because of evening out. 

Whichever way you look from, it is the small entry quantum that works for you.

Trigger Vigour

Can you pull a trigger?

Or do you hesitate?

Are you afraid?

This is vital stuff, and you need to recognize this about yourself.

Why?

We’ll go into the why some other time, but let if suffice for now to say that trigger dynamics are part of basic risk-profiling, and if one’s market movement is not as per one’s risk-profile, things generally go wrong.

Back to triggers.

Cast aside pulling, are you able to recognize a trigger?

What comes before recognition?

Definition.

Have you defined market triggers?

Everyone has a different definition of when to act.

You need to know when you are going to act.

No ifs, no buts, just clear-cut action.

Your system will tell you that it’s time for action.

You do a double-check.

Are you recognizing what your system is telling you?

Is what it’s telling you recognized by your mind as a time to act?

Yes?

Then act.

What is the action, you ask?

Hmmm.

Why are you asking that?

You have to define the action too.

Just like you defined the conditions for action, you also define what exactly the action is going to be.

When you act, you pull a trigger. The quantum and style of your action is your follow-through after the trigger is pulled.

Make it mechanical.

As much as possible.

Going for the Jugular

It’s time.

Why…is it time?

And, time for what?

It’s time to go for the jugular.

Meaning?

There comes a time, when, after working hard, struggling, doing the whole jig, the rigmarole, you achieve your basics. 

Well done. Pat on your back. 

Then you secure these basics. 

Forever. 

If you can. 

Wonderful. More pats.

Worry factor is now out of the equation. 

Your family is secure. 

Food, safety, education, all basics intact.

Fantastic. You deserve an award. Not that anyone’s going to give you one. Frankly, nobody could care less. Never mind. You know in your mind that you’ve achieved a milestone, and that’s enough for you. 

Whats the next step…

…for you?

Jugular. 

What is this jugular?

Multiplier.

X-factor.

Call it what you will.

What does this mysterious thing do?

Better question is, what is it capable of?

You’re looking to multiply your networth. 

Isn’t everyone?

This is different.

Why?

Because it is coming as a logical conclusion, and not as a first-step with no experience and no secure basics. 

You’re keeping your head-earned basics secure. 

Nothing is touching these. You’ll be surprised at the kind of courage secure basics give you to act further. 

Next, you’ve identified an area where your skill-set can be leveraged into huge profits with minimal risk. 

Specifically in the market, these areas are abundant. 

So what exactly will you be doing?

Playing on a minuscule portion of your net worth. Let’s say not more than 2 %.

Leverage.

Stoploss.

Profit-run.

Position-sizing. Scaling up upon profits. Scaling down upon losses. 

Overcoming your demons. 

Fear.

Worry.

Hypertension.

Exuberance.

Hubris.

Complaecency. 

Going beyond. 

Multiplying.

Going for the jugular. 

Frozen

Frozen? 

It’s ok. 

Breathe. 

You need to acknowledge that you’re frozen. 

Without that, the next step won’t come. 

It’s normal to freeze sometimes. Just acknowledge it. Then learn. 

For example, I acknowledge that I’m currently frozen wrt to the USDINR short trade. Missed entry. Next opportunity to enter never developed for me, and the underlying is currently in free fall. Don’t have the guts to short it at this level. Yeah, I’m frozen all right.

However, the fact that I’m acknowledging it opens up the learning window. 

Why did I miss entry?

I know why I froze. Fear. What I need to understand is why I allowed a situation to develop that would lead to fear. 

Ok. 

Was running super busy. 

Neglected the underlying. 

Kept postponing entry… 

… till free-fall started. 

It’s good to be busy. 

Hmmm, so this can happen again. 

How do I stop this from happening again? 

If I ID a setup, I need to take it. 

No second-guessing. 

What about strategy? 

Meaning, am I going with a short strategy for USDINR? Or am I keeping the window open for a long strategy?

See, that’s it.

Keeping short and long windows open makes me second-guess all the time. 

So can I go in one-direction wrt USDINR all the time? 

What speaks for it? 

Underlying is falling from a height. Good. 

Short only means no second-guessing. You just go short, period. 

Stoploss will save ruin. 

Not nipping profits in the bud will amass fortunes. 

Can the underlying keep falling over the next few years? 

Why not? Modi’s looking set for 2019. 

Hmmm, so a short only strategy has a lot going for itself. 

There’s more. Future month contracts are quoted at a premium. The premium evaporates over the current month. This move is in your favour if you’re short. 

Ok, enough. 

Yeah, there’s enough on the table to warrant a short only strategy for USDINR. 

SEE? 

Learning process. 

Why did it happen?

Because I acknowledged that I had frozen. 

Now, my strategy is more fine-tuned and I’m probably less prone to second-guessing. 

You need to pull off such stuff when you freeze. 

Use the freeze to evolve. 

Did you invite the f-word?

The next trade… 
… yeah… 
… take it. 
What? 
Can’t? 
Why?  
Afraid of what might happen. 
That’s the whole thing. 
You see a setup – you trade the setup.
When you see a setup, there are no more what-ifs, supposings or anything. Then, it’s just you and the trade. Take the trade. 
No room for f-(ear). It’s the new f-word.  
How do you drive fear out of the equation? 
Risk a miniscule fraction of your networth per trade. 
Don’t make trading your bread and butter. Make it your bonus. 
Don’t allow anyone else’s negativity to creep in. Don’t talk to people. Trade on your own. No room for tips. 
Don’t listen to your broker. Tell him what to do.
Don’t trade under compulsion. 
Enjoy your trading. 
Once in the trade, lose the mini-bias that got you in. Now, just manage the trade. 
Stop hit? You’re out. 
Run? 
Raise stop. 
Running? 
Keep raising stop. 
Losing some of your notional profits? Market throws you out?
Good. That’s a proper exit. 
See, fear wasn’t allowed to the party. 
Look for next setup. 
Position-size your entry. 
Take the next trade. 
And so on and so forth. 
Not upto trading?
Ok. Don’t trade. Till you’re up to it.
 
Demons out of the way? 
 
Up to trading again? 
 
See the next setup?
 
Take it.

How I Wish to Trade

Tension?

No.

Hassle-free?

Yes.

Profit?

Yes.

Fun?

Too. 

I want it to make me want to come back. 

In the background?

Yes.

Part of my normal life?

No. 

Disturbing me in the night?

No?

Terminal on – ideally once a day. Max twice. That’s it. 

Protection?

Yes. Stops for forex. Hedges for options. No naked options. 

Exits?

Make me exit. Yeah, Mrs. Market needs to make me exit. I don’t wish to exit on my own. She needs to throw me out of a trade. 

Fear?

None.

Why?

Bread and butter secured through other-than-trading instruments.

Trading with surplus.

Surplus can potentially become zero. Will I still take the next trade?

Yes. After scanning strategy for errors.

Loss?

Will take small ones, again and again and again. That’s the only way to find the large profit moves. 

Once profit sets in, what then?

Nothing then. 

Normal. 

Behaving as if nothing has happened. 

Giving the trade room. 

It needs to make even more profit. 

It is a potential multi-x trade. Why should I nip it in the bud? As I said, make me exit. Throw me out. 

Family life?

Balanced.

Remnant anger from trading?

None. 

When yes, stop trading. Trading should never be allowed to disturb family life. 

Evolutionary?

Forever. Learning, learning, learning. 

Bias? 

None. 

News?

No. 

Tips?

None. 

Peers?

Maybe to start a strategy with. After strategy is made to fit – no peers any more. 

Discussion?

None. Hopefully. 

Don’t like to discuss trades after terminal shuts. 

Losses piling up?

Review strategy. Discard, renew, implement, trade again. 

Profits piling up?

Great. Do nothing. 

Are you getting the gist?

Similarly, you need to figure out how you might want to trade.

Many things I might be doing will not suit you automatically. 

You need to make things fit. 

If something doesn’t fit, discard it. 

Look for something new that might fit. 

Make a trading strategy that’s lucrative and gels with you and your lifestyle and environment. 

Such a strategy will blossom. For you.