Time and tide waits for no man
Opportunities come and go.
One needs confidence and boldness in executing a long or short order based on whatever information he can gather at that point in time.
The important question to ask would be : What if I am wrong ? How much risk (financially) am I prepared to stake out to receive a potential gain ?
If you can risk say, $10 to win $15 or $20, then your risk/reward ratio is 1:1.5 or 1:2. Over time, if you continue to find several trades with such good risk/reward ratios, then the success of your portfolio is going to be much higher.
This is simple mathematics. And in addition to that and do well in trading, these are the important ingredients that I think are useful :
1. Keeping your trade bets to 1% of your capital. That means, if you have $10,000 as capital, each trade that you can afford to lose is 1% or $100. In other words, you have 100 chances of betting in the stock market with a bet size of $100 for 100 times. Based on probability, the chances of losing 100 times consecutively is very remote. Often, traders find themselves out of the game because of fear and greed. After several wins, they think they are invincible or God-like and starts to stray from their system. They bet bigger from 1% to 5 or 10% per trade. They do not use Stop Loss, believing market is in their control, etc. That costly mistake which I had made in the past costs me dearly and I hope newbie traders would take this seriously.
2. Finding trades that offer higher risk/reward ratios.
For me, I avoid freshly mint IPOs no matter how attractive they might be. Such speculative bets are too tempting and without fundamentals (proven track record) , it can swing both ways and to have capital tied up while waiting for the share price to go up is a tormenting experience.
Thus, finding companies with solid track record is like skiing downwards, requiring less efforts.
Trades such as Amazon, Facebook, Tencent, Alibaba, to name a few. With a longer time horizon (5-10 years), one can lower his risks by buying and holding longer to these stocks.
3. Number of trades is important - Much like doing a research, you need a sample size to qualify your data is reliable. If you go to the street and only ask one person for his taste in a particular drink, his answers may be biased. But work that number to 10,000 or 100,000 , then the distribution is more balanced. See the point? In trading/investment , this concept is the same as well. You cannot do 5-10 trades and say, it is hard to make money or it is not profitable. Stick to a minimum of 30-50 trades before you draw the conclusion.
4. Use the same strategy - If you are like me, then stick to using trend lines, support and resistance, price action as your strategy throughout. Do not jump from one to another just because you lost a few trades. The myth of trading/investment is finding the next holy grail in strategies. Vendors out there would want you to believe that so they can continue selling you their signals that rack in thousands of dollars. (ask yourself, if you find the magic potion, would you sell it or keep to yourself and make more money?)
5. The media is not the market - Without a day goes by you find the market does not have a naysayer telling you the market has reached the top and is going for a crash or a bear market is forthcoming. And mind you, these are well known economists, travelled round the world giving speeches and you would think what they say are credible. Don' take my words for it, go back in time and track it and see if their predictions come true. The media job is to sell you news, the more sensational , the better the viewership. I don't know about falsehoods as that is a thin line to thread on. As traders/investors, it is your choice, responsibility to choose what to read and what to believe in.
6. Buy low , sell high - While this concept is technically right, some traders confused with low as cheap. So, they would rather buy 10 lots of a 0.50 cents stock than to buy a 1 lot of $10 stock. Their logic is at 0.50, the potential for it to fall further is 0.50 but the upside is huge compared to the $10 stock. They got it partially right !
We have witnessed the downfall of many aviation, entertainment and tourism stocks that have plummeted lately due to the Covid-19. Look up Hertz, Norwegian Cruise Line, SIA, etc. Yes, some of these blue chip stocks will recover. But the question is when ? Is your time line aligned to their uprising in months or years to come ? If you are at your 20's, perhaps you have 20 -30 years to wait and you can afford it. But at 50-60, then you won't want to bet on it. You want a safer and conservative bet.
7. The economy is beaten and stocks are skyrocketing. That is what is happening right now ! So many are also fearful to invest now , thinking a market crash will come since many countries are down with recession (technical) and high unemployment. Yes, the Q3 and Q4 GDP for some countries may be bad, even negative but one look at the world indices reveal the opposite. Almost every countries stock market is on a tear, breaking record high month after month. The higher it goes, the more fearful some get and become more reluctant to participate, missing opportunities after opportunities. And when finally it is almost at the peak, they decided to get in , only to see losses and reds in their account which confirm their beliefs, investment is risky!
The stock market is forward looking and it has nothing to do with the economy (not all will agree with this of course which is fine). People are feeling euphoric that a vaccine is now on the way and many with the unemployment benefits on hand are using it to bet on the stock market. After all, banks are dishing out ridiculously low or negative interest rates and with no yields to chase, all their moneys are going to the stock market. And of course, the biggest player of all times is the FED. From printing trillions of dollars, they use it to help buy junk bonds, corporate bonds, ETFs and soon they will also buy equities. How , then can the stock market fall ?
With low interest rates, enterprises are doing well (not retail tenants in malls) can use the loan money to buy up company shares, expand and innovate. Many trades like smartphones are ultra competitive and no company can afford to rest on the laurels thinking they are the market leader of today. Look at Xiaomi, Huawei, Vivo - top smart phone brands in China and fast catching up with the global giants like Samsung and Apple. Gone are the days of monopolistic power and with Government being forced to decentralised and opening up their economies to foreign countries, market shares will be diluted. The beneficiaries are the retail buyers, with more options to choose from and at more competitive prices.
I hope this summary has been useful and beneficial to you as it has for me , over the years. It may not be easy to stick it 100% but keep it close to your heart, discipline yourself to adhere to it till you see the profitability and the rest of the journey is repeat and rinse which requires even more discipline.
To our success , cheers !
One needs confidence and boldness in executing a long or short order based on whatever information he can gather at that point in time.
The important question to ask would be : What if I am wrong ? How much risk (financially) am I prepared to stake out to receive a potential gain ?
If you can risk say, $10 to win $15 or $20, then your risk/reward ratio is 1:1.5 or 1:2. Over time, if you continue to find several trades with such good risk/reward ratios, then the success of your portfolio is going to be much higher.
This is simple mathematics. And in addition to that and do well in trading, these are the important ingredients that I think are useful :
1. Keeping your trade bets to 1% of your capital. That means, if you have $10,000 as capital, each trade that you can afford to lose is 1% or $100. In other words, you have 100 chances of betting in the stock market with a bet size of $100 for 100 times. Based on probability, the chances of losing 100 times consecutively is very remote. Often, traders find themselves out of the game because of fear and greed. After several wins, they think they are invincible or God-like and starts to stray from their system. They bet bigger from 1% to 5 or 10% per trade. They do not use Stop Loss, believing market is in their control, etc. That costly mistake which I had made in the past costs me dearly and I hope newbie traders would take this seriously.
2. Finding trades that offer higher risk/reward ratios.
For me, I avoid freshly mint IPOs no matter how attractive they might be. Such speculative bets are too tempting and without fundamentals (proven track record) , it can swing both ways and to have capital tied up while waiting for the share price to go up is a tormenting experience.
Thus, finding companies with solid track record is like skiing downwards, requiring less efforts.
Trades such as Amazon, Facebook, Tencent, Alibaba, to name a few. With a longer time horizon (5-10 years), one can lower his risks by buying and holding longer to these stocks.
3. Number of trades is important - Much like doing a research, you need a sample size to qualify your data is reliable. If you go to the street and only ask one person for his taste in a particular drink, his answers may be biased. But work that number to 10,000 or 100,000 , then the distribution is more balanced. See the point? In trading/investment , this concept is the same as well. You cannot do 5-10 trades and say, it is hard to make money or it is not profitable. Stick to a minimum of 30-50 trades before you draw the conclusion.
4. Use the same strategy - If you are like me, then stick to using trend lines, support and resistance, price action as your strategy throughout. Do not jump from one to another just because you lost a few trades. The myth of trading/investment is finding the next holy grail in strategies. Vendors out there would want you to believe that so they can continue selling you their signals that rack in thousands of dollars. (ask yourself, if you find the magic potion, would you sell it or keep to yourself and make more money?)
5. The media is not the market - Without a day goes by you find the market does not have a naysayer telling you the market has reached the top and is going for a crash or a bear market is forthcoming. And mind you, these are well known economists, travelled round the world giving speeches and you would think what they say are credible. Don' take my words for it, go back in time and track it and see if their predictions come true. The media job is to sell you news, the more sensational , the better the viewership. I don't know about falsehoods as that is a thin line to thread on. As traders/investors, it is your choice, responsibility to choose what to read and what to believe in.
6. Buy low , sell high - While this concept is technically right, some traders confused with low as cheap. So, they would rather buy 10 lots of a 0.50 cents stock than to buy a 1 lot of $10 stock. Their logic is at 0.50, the potential for it to fall further is 0.50 but the upside is huge compared to the $10 stock. They got it partially right !
We have witnessed the downfall of many aviation, entertainment and tourism stocks that have plummeted lately due to the Covid-19. Look up Hertz, Norwegian Cruise Line, SIA, etc. Yes, some of these blue chip stocks will recover. But the question is when ? Is your time line aligned to their uprising in months or years to come ? If you are at your 20's, perhaps you have 20 -30 years to wait and you can afford it. But at 50-60, then you won't want to bet on it. You want a safer and conservative bet.
7. The economy is beaten and stocks are skyrocketing. That is what is happening right now ! So many are also fearful to invest now , thinking a market crash will come since many countries are down with recession (technical) and high unemployment. Yes, the Q3 and Q4 GDP for some countries may be bad, even negative but one look at the world indices reveal the opposite. Almost every countries stock market is on a tear, breaking record high month after month. The higher it goes, the more fearful some get and become more reluctant to participate, missing opportunities after opportunities. And when finally it is almost at the peak, they decided to get in , only to see losses and reds in their account which confirm their beliefs, investment is risky!
The stock market is forward looking and it has nothing to do with the economy (not all will agree with this of course which is fine). People are feeling euphoric that a vaccine is now on the way and many with the unemployment benefits on hand are using it to bet on the stock market. After all, banks are dishing out ridiculously low or negative interest rates and with no yields to chase, all their moneys are going to the stock market. And of course, the biggest player of all times is the FED. From printing trillions of dollars, they use it to help buy junk bonds, corporate bonds, ETFs and soon they will also buy equities. How , then can the stock market fall ?
With low interest rates, enterprises are doing well (not retail tenants in malls) can use the loan money to buy up company shares, expand and innovate. Many trades like smartphones are ultra competitive and no company can afford to rest on the laurels thinking they are the market leader of today. Look at Xiaomi, Huawei, Vivo - top smart phone brands in China and fast catching up with the global giants like Samsung and Apple. Gone are the days of monopolistic power and with Government being forced to decentralised and opening up their economies to foreign countries, market shares will be diluted. The beneficiaries are the retail buyers, with more options to choose from and at more competitive prices.
I hope this summary has been useful and beneficial to you as it has for me , over the years. It may not be easy to stick it 100% but keep it close to your heart, discipline yourself to adhere to it till you see the profitability and the rest of the journey is repeat and rinse which requires even more discipline.
To our success , cheers !
Comment:
Halleujah, it went up nicely !