Useless vs Useful Expansion

I’m guilty of useless expansion. 

I end up doing it all the time. 

Can’t help myself, you see.

I like to keep exploring new stuff in the market. 

The silver lining is, the even though I might be expanding sideways, there are two good things happening also. 

There is no scaling up happening immediately. Good. 

There is also a lot of discarding going on. Things that don’t work out are eventually abandoned. Great. 

My issue is that I might have between 1 to 2 useless strategies in my repertoire at any given time. 

These strategies are not working. In fact they are dying out. Reasons can be many. A strategy might be sound, but it might not be a fit. 

For a strategy to work for you, it must be practically lucrative in the long run, and it must fit you. 

By the time I realize that a strategy needs to be discarded, money has been lost. Tuition fees? Yes. 

Ultimately, things boil down to a handful of successful strategies. It can even ultimately boil down to one or two successful ones.

Get there. I’m trying too. To do so, useless strategies will need to be discarded, like, now. 

The problem is, you don’t know that a strategy is useless till it has hit you a few times. 

Also, you don’t wish to discard something that you think might just work out for you in the long run. 

Fine. Keep grinding, and ultimately narrow down your sideways expansion, till you’re only working with strategies that are yielding, and show a long-term promise of being around. 

Right. 

You’re there. 

Now you can scale up. Doing so using a yielding strategy that fits is called useful expansion. 

Scale up slowly. 

You can position-size, and scale up using profits. This way you are not putting in extra principal. Let the strategy continue to prove itself by yielding. As long as it does so, you keep scaling up on your positions using the newly earned profits. 

Why is useful expansion not easy to maintain?

We get carried away.

We might scale up too fast, and then baulk at a loss when the size of the loss is too difficult to swallow. Large input can result in a largish potential loss.

Trading is about containing loss, and letting profits run. 

Scaling up too fast makes an early loss look big if we haven’t tasted the corresponding potential profits yet. Such an event can even cause us to abandon a successful strategy because we are disheartened. 

Therefore, try not to scale up by putting in new principal, if you can help it. 

Try scaling up on profits alone.

Position-sizing automatically controls the scale-up-scale-down factors by defining the size of a constant stop as a percentage of the principal remaining between trades.

Position-sizing makes one scale-up and scale-down on auto-pilot in a relatively balanced fashion.

Please incorporate this wonderful ideology (which comes from the stable of Dr. Van Tharp) into your trading strategy. 

🙂

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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!

🙂

Poker and the Markets

Professional poker is not a gamble, when one takes a large sample-size of many, many hands into consideration. 

On the other hand, non-pro poker is more likely a gamble. 

So, what’s the difference between professional poker and non-pro poker?

Strategy.

Players make “mistakes”. 

Mistakes cause losses. Lets define “mistake” here as anything that causes loss. 

Winning players strategize in such a manner, that their mistakes make them lesser than average losses, and sometimes, no losses at all, but even a win results. 

Reads, bluffs, meta-game, what have you,…

…the reason the player is a winner is that he or she is winning even with hands that would normally cause a loss.

Also, when the pro senses a winning hand, the pro bets big because the odds are in his or her favour, and the pro would like to capitalize, given the odds.

A few big wins coupled with many small losses, whereby the sum total of all losses is lesser than the sum total of the wins – that’s a winning combination. 

Let’s just take this element of the winning combination, and see how it’s implementable in the markets.

Market play means mistakes. 

Almost all the time, we’re making mistakes while we’re attempting market action.

However, because of our due diligence, we make intelligent moves too. 

Our intelligent play wins us money. 

Our mistakes lose us money. 

How do we let our mistakes lose less money?

By having a very small entry quantum each time. 

How do we allow our intelligent moves to win big?

By not nipping a winner in the bud. Also, by putting money into the winner when it dips, and at an appropriate entry level.

What do we have here, then?

Many small mistakes, and a few big wins, whereby the sum total of the mistakes is lesser than the sum total of the wins.

This is the same winning combination we discussed above.

Voilà.

🙂

Bifurcation Ability – Do you have it?

No?

Develop it asap, please.

Otherwise, don’t be in more than one market. 

However, who is satisfied with just one market?

That would leave one with a lot of time on one’s hands, wouldn’t it?

Time on hands means looking for another market, and another, and another, till one’s time is fully occupied, and one’s thirst for market activity quenched. 

With multiple markets on one’s radar, one needs to bifurcate. 

As in time and mind compartmentalisation…

…which basically translates as…

…that when you’re working on the one market, you’re not letting any overhang from another market bother you. 

If an overhang is bothering you, take two, or take ten, or take however long it takes to kill the overhang. 

Loss, depression, profit, jubilation, exuberation, whatever cause or emotion is prevailing, let its effect come and let it go. Wait for it to go. Then open the next market. The last thing you want is for the other market to be observed and analysed while there’s emotional bias from a former market. 

Therefore…market done…market closed…next market. There’s no other formula here. 

Most market people are both traders and investors. 

This is the area where they really, really need to bifurcate and compartmentalise. 

Why?

Trading and investing involve diametrically opposite implementation strategies, that is why. 

If you’re making changes within your investment portfolio, but are still in the trading mindset, you are going to make major mistakes, which will most definitely disturb whatever balance you have managed to instill within your investment portfolio. 

Similarly, if you’re looking to open a trade and are still in the investing frame of mind, you are optimally poised to botch up your trade big time. 

This is how I approach the matter. 

I do a first half – second half thing. 

The first half during which the markets are open are for investment decisions. 

Then there’s lunch.

By lunch, I forget how the first half of the day has been spent. At least, I try and forget. 

I let the scrumptious lunch help me drown my memory. 

After lunch, the second half starts, which is dedicated to trading decisions.

Strategies used after lunch are diametrically opposite to the ones used before lunch. 

This works for me. 

There comes a time when there are no more investment decisions to be taken, at least for a while. Markets become expensive, and margin of safety vanishes. One is not thinking of entries. Exits are far, far away, as this is long-term investing. Here is when one can dedicate oneself to one’s trading. One’s got the whole day for it. It’s a great situation, because the need for bifurcation between trading and investing is gone. 

Then there comes a time where no trades are developing. Lovely.

Right, pack up, take a break, let’s go for a short and sweet holiday!

Who the hell wants to detach?

Easy to spell, right?

Hard to attain, though. 

Why would one want to detach anyways?

Detachment is a must for success in the markets.

Any market.

Detachment is not really a human instinct.

We are born because we are attached. 

Attachment comes naturally to us. 

Detachment does not. 

Cut to the markets. 

Market psychology works in reverse to our natural instincts. That’s why, losers are many, and winners a few. 

That, by the way, is the similarity between detachment and market success.

We’ll need to learn to detach, if we want winning market-play. 

This is an achievement-oriented society. 

We like resumés.

We like to post it the moment we nail it. 

We like to book profit the moment we have a mover. 

We like to hide our short-comings. 

Weakness?

What weakness?

We nurture our losers, hoping they’ll at least make it to break-even one day so that we can book them. 

See?

Yes, market psychology works in reverse to our way of functioning. 

What does detachment do?

It takes us away from the euphoria of a mover. 

We learn to let the mover … move. 

We learn to not book it. 

It then moves, and moves. 

Eventually, it starts to fall.

We set a stop and let the market throw us out. 

That’s how one exits an underlying showing a profit. 

What has detachment done here?

It has caused us to book a big profit instead of a small one. 

What else does detachment do?

It reforms us such that we recognize and acknowledge weakness, and then cut the weakness off immediately upon such recognition and acknowledgement, as per the definitions of our trading systems.

What has detachment done here?

It has caused us to suffer a smaller loss now rather than a potentially much larger loss later.

Repetition of this cycle – again and again and again – sorts us out for life. 

Looper

I know, that Bruce Willis sci-fi movie… 

… is also called Looper. 

Know any other Loopers? 

There’s one in your body. 

In hardware terms, it’s your brain. 

In software terms, it’s your mind. 

Its ability to loop can become a tendency. 

Any problems with that? 

Sure. 

Big ones. 

Imagine a trade. 

Goes wrong. 

You’re drained. 

You get out. 

Loss.

Done? 

No. 

At this point, don’t let your mind loop. 

It will, if you allow it the leeway. 

If it loops, you’ve lost the energy value of two trades or more (fatigue) while losing one trade. 

Don’t delve on the loss. 

Move on in search of your next winning trade. 

Define conditions that stop your mind from looping. 

For example, when entry value is small enough to not be bothered about, its partial or even full loss might not be enough to cause your mind to loop. 

And that’s the position you want to be in. 

No looping.

No overthinking. 

Just trading. 

🙂