We’ve all heard the “experts” preach to us that we should only take trades which offer at least a 2:1, or better yet a 3:1 reward to risk ratio and on the surface this seems like sound advice, but is it really?
RETHINK YOUR STRATEGY
I used to be one of those educators who would jump on the risk/reward bandwagon until one day when I stepped back and took an objective look at what trading is and how I can best optimize my chances of success. When I did this I realized that not only was the whole risk/reward premise false but that it had the potential to ruin chances for trading success by keeping me out of some of the best trades.
YOUR WINNERS CAN RUN….IF YOU LET THEM
The proponents of risk/reward ratios say that in order to be successful the trade must out produce the amount of money you have at risk by at least double or triple your risk amount but what they fail to take into consideration is that the reward side of any trade is unknown.
WHAT YOU CONTROL
You see the only part of the trading equation that you have any control over is the risk side of the trade. The reward side of any trade is a complete mystery. Oh sure, we all have our best guesses as to where the market might go next, but in the end it’s really just a crap shoot. Sometimes we’re right and sometimes we’re wrong and if we’re honest with ourselves we will admit that we really don’t know where the market is going next. (more…)
Archives of “amount of money” tag
rssAn Investment Poem
The newfound opportunity arises softly at first
Like pearl shaped dew drops on a tea leaf
Quite unexpected but fast entranced and immersed
Her presence over the former solitude brings relief
More precious than any amount of money or power
More beautiful than the most stunning of jewels
You cannot appreciate the sweet without the sour
The kind of perfect pattern that makes investors drool
Finding shares to short are most difficult to borrow
But who would bet against an investment with so much potential?
Elation is now the norm starting yesterday, today and tomorrow
The biggest challenge lay in exercising prudential
Potentially an addicted lost cause am I
An investor who has witnessed too many ups and downs
Is it possible to stay grounded or is my destiny the sky?
Disciplined I promise to be, carefully soaking in the sights and sounds
Because true greatness only comes around every so often
Where your hands can’t help but shake and you feel it in your gut
The time is now, the place is here — this is Zen
As nature intended, this squirrel has found his nut
Wisdom from The New Market Wizards
Here are the excerpts from “The New Market Wizards” which are very useful tips from the top traders:
Randy McKay
“One very interesting think I’ve found is that virtually every successful trader I know ultimately ended up with a trading style suited to his personality… My trading style blends both of these opposing personality and put where it belongs: trading. And, I take the conservative part of my personality and put it where it belongs: money management. My money management techniques are extremely conservative. I never risk anything approaching the total amount of money in my account, let alone my total funds.”
William Echkardt
“What really matters is the long-run distribution of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions that you have beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading – giving too much rope and taking profits prematurely – are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
“Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away. Since the market spends more time in consolidations than in trends, it teaches you to buy dips and sell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough, to return to prices it has visited before, it teaches you to hold on to bad trades. The market likes to lull you into the false security of high success rate techniques, which often lose disastrously in the long run. The general idea is that what works most of the time is nearly the opposite of what works in the long run.” (more…)
Walker, Wave Theory for Alternative Investments
Metaphors are tricky little beasts. Used well, they can make prose vivid; used poorly, they can sometimes become intrusive clichés. In the case of Stephen Todd Walker’s Wave Theory for Alternative Investments: Riding the Wave with Hedge Funds, Commodities, and Venture Capital (McGraw-Hill, 2011) the reader often yearns to move inland and be done with waves, surfers, and forced quotations. (Among the most egregious offenders in the quotation department is [on p. 309] the following: “In Herman Melville’s Moby Dick, the author explained that ‘[t]he sea was as a crucible of molten gold, that bubblingly leaps with light and heat.’ One can plainly see waves with the commodity gold.” Poor Melville and his “explanation.”)
Although the author pays lip service to Elliott wave theory, his waves are more generic. As he writes, “Wave theory is simply the belief that all securities move in waves (patterns, cycles, or trends).” (p. 3) Few people today would dispute this belief, so we can quickly dispense with any further talk about waves and move directly to the substance of the book—investing in venture capital, commodities, and hedge funds.
The most informative part of the book focuses on venture capital, with which the author was involved in the 1990s when he worked at Alex. Brown. He traces the history of venture capital, highlights some of the principal players, assesses the performance of venture capital, and discusses advantages and disadvantages for investors. One of the disadvantages is the phenomenon of capital calls. A client commits a certain amount of money, say $1 million. But “few funds take all the money up front today. As the venture fund identifies new opportunities, they will call on their investors to put more money into the fund…. Because these calls are random and over long periods (years), it can be burdensome to an investor. Should the investor (for whatever reason) decide not to invest, there are normally severe penalties.” (p. 172) (more…)