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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Happening…or not happening?

Is that the question?

Hmmmm. 

Valid question. 

On any particular day, we are confronted with this question. Multiple times. 

Life itself throws this question at us often, at pivot-points or crossroads. 

Well, why should the markets be left behind? You guessed it. They portray this behaviour…also. 

Take the cmp of an underlying. 

Is it crossing resistance? Breaking support? Forming a pivot? Peaking? Bottoming? What have you. 

Is whatever’s happening happening or not happening?

What do you do?

Aha. Got you there. Who said anything about doing something? The question about doing something is a wrong question. 

However, it becomes a practical question, because, well, who has patience today?

Yeah, who’s willing to wait and watch, right?

So, in all practicality, what do you do?

First you try not to ask the question. You just observe. 

Then you get jumpy, and do ask the question, simultaneously answering it by telling yourself to wait and watch. 

Next you’re seen egging the markets on for an outcome. 

That’s not good. 

Markets are not going to behave as per your wishes. 

Ok, so here’s the game-changer. 

Change your activity. 

Yes, do something else. 

Put your system on auto-pilot, and engage your mind elsewhere. 

Like I’m writing this article here. 

What’s happening in the backdrop?

My USDINR trade is going nowhere. 

Couldn’t catch a decent portion of the move on the GBP breakout, and now I can’t seem to get a new trade triggered.

My stock-screener refuses to find me a stock in the agri-sector which is to my liking.

My iPad’s gone all wonky and is acting pricy about photo and music syncs. 

Family-health-insurance-premium due…

… got to get that nomination going on my demat…

… AC gas leak…

… document sorting overdue…

… and so on and so forth. 

Meanwhile, I write this article. 

I’m at peace. Writing relaxes me. It benefits the reader too. It’ll live on after me. It is positivity in action. It gives me a sense of purpose. I forget about all the things that are happening and / or not happening. 

That’s what you are going to do. You are going to find an activity that takes you away, to another plane, for just a while, while your other stuff is still undecided. 

There are some things, though, that one needs to make happen. Sometimes one needs to keep pushing. Non-pursuance would be like giving up. 

In this event, you keep banging your head against a wall. 

Two things are going to happen. 

Either you are going to get hurt and back off…

… or, the wall is going to break down.

Yes, I do admit, that there are some very select areas in life that where one decides to bang full-on. 

We’re not afraid. When push comes to shove, we’re all there and ready for some head-banging. 

However, wrt all the other not-so-drastic things, we’re conserving our energies and going to our happy-and-safe-place till these not-so-drastic things are yet undecided. 

Yeah, we’re happier and healthier that way.