Kevin Bambrough:
In the early days of my trading I decided to try to develop a 'system' or 'style' that would work for me. After reading piles of investment books covering all sorts of disciplines I eventually refined a technique.
So I started by trying to decide first of all if a sector was in a sustainable bull or bear and (no matter what) never trade against the overall trend. Long only in bull sectors. Short only in bears.
Next I try to read all I can on the companies and sector - as well as other economic factors that influence it - so I'm reasonably on top of things fundamentally and trying to trade long on the best of the best. Then using technical analysis I try to work my way into investments profitably.
Early days I would do a lot of shorter term trades because I lacked experience and the conviction to really stay with things. But, I managed to do well enough to make a career of it.
I often would say that my goal was to be right just a little better than 50% of the time. But also lose $1 when I'm wrong versus making $4 when I'm right. I 'grew up' trading full-time in a sort of day trading shop where people paid for their desks with commissions or had to pay a fee. There was a lot of pressure to trade, and to pay commissions and thereby lower commission costs. (Lower fees with volume). I stuck to my system and I watched countless people come and go, often wrecking their life savings.
Biggest problem is most people hate admitting they're wrong and taking losses.* They let them grow beyond plan. Also many, will hold a loss 10-20% against them. But then quickly take a 10-20% profit. It's all easier said than done but learning to develop realistic expectations is key. If you don't understand risk to reward you're screwed. Very difficult to judge if it's a 50/50 bet that you'll make 4 and only lose 1. But if you can't do it on a small scale no point doing it on a larger scale. Or with more volume of trades.
The good thing is that if you really dedicate yourself to learning, and start slow, and track yourself. Especially tracking your ability to stick to the plan, then you can make it and it will be very rewarding.
But just know if you lack the discipline to sell when you said you would... you're destined to get smoked badly. I've seen many a trader that has a great run. And bull markets are great at convicting people they are geniuses. But, there's often nasty corrections of 50%.
Many 30% decreases along the way. Geniuses with margin get destroyed. Margin selling is shocking to see. Stocks just relentlessly getting pounded by people that are forced to liquidate. Plus bad market corrections change the economy and inflation quickly destroy themes.
If you're a resource investor and plan to try to play this entire bull, just be careful and not too greedy. This particular resource bull is gonna be super volatile.
The commodity inflation and supply chain issues generated from attempting to double the power grid, and the transition to electric cars is going to lead to mini recessions along the way. High power prices and general inflation will change consumer spending.
One thing I've always done is force myself to take a bit of profit after a great run and then buy something in a different market sector. I think raising a bit of cash from winning resource sectors and accumulating gold and silver will work out well and also help me sleep at night.
Source:
* Why it may pay to sell, even at a loss
By Mark Eidem
"When should I sell?" This is the most common question I am asked in trading workshops and individual client meetings. It's also one of the most important. Failure to clearly define your rules for selling a position can lead to your holding onto large losses or letting large profits slip away. Why? It's simple: Emotions get in the way.
In this article, we'll take a look at some common behavioral tendencies that keep investors from selling. Then, we'll explore how to develop your own personal sell discipline.
4 Big Reasons for holding out:
1. Greed & Fear
"We have met the enemy and he is us," a famous saying observes. Investors who have selling issues know this all too well. They may enter a trade with a clear notion of when they will exit, but then abandon those plans because of one of these behavioral lapses:
1a). Hope: "I hope it goes back up!" Liz Ann Sonders, Schwab's Chief Investment Strategist, has observed many times that "buy and hold" has now been replaced with "buy and hope." According to Sonders, "hope is not an investment strategy."
1 b). Know: "But I know it will go back up!" The more research we have done on a company, the more confident we are in our decision to buy its stock and to continue to hold it, even at a loss. And the more familiar we are with the company, the more likely we are to follow this pattern of behavior. While there is an investing style to buy companies whose products we know and like, the reality is that nobody "knows" anything about the future price of a stock nor the future course of the markets in general.
1 c). Can't: "It can't go any lower." The only lower limit to a stock's potential price is zero. If it is not trading at zero yet, it can in fact go lower.
2. Status quo bias
Choosing not to decide is still a decision. When you think about taking a loss, it may be less painful to cling to the hope that a rebound in price erases the loss, versus the certain realization of taking that loss. I have often heard the line, "It is only a paper loss until I sell." Funny, yet I cannot recall an investor ever saying, "It is only a paper profit until I sell."
3. The endowment effect
This is the behavioral tendency to overvalue something we already own. When it comes to selling a stock we own, it is mentally difficult for us to sell for less when we have seen the stock trade at a higher price. We tend to feel that we are entitled to that price now. Here are two examples in the following chart: [see in link below]
4. Loss aversion
Another principle of behavioral finance theory is our natural aversion to realizing losses. It has been said that a 10 percent loss hurts at least twice as much as a 10 percent gain feels good. When we add status quo bias and the endowment effect, it is easy to see where loss aversion gets its power over our decisions.
Profits versus wins — the overwhelming desire to be "right."
You don't have to be a "type A" personality to make this common error in investing; most people are conditioned to be "right." To get your driver's license, pass an exam, ace an interview — you must get the answers right. However, this mentality can overwhelm and compromise your trading results.
Many individual investors I have worked with over time demonstrate through their actions that they would rather realize a winning trade, even if it isn't all that profitable. They focus on their win/loss ratio, or how often they are correct in a buy decision that gains in price. Yet far more important to trading success is the ratio of average dollars won per winning trade versus average dollars lost per losing trade.
Many professional traders have win/loss ratios well below 50 percent, yet they are very profitable because their primary focus is upon keeping the inevitable losses very small relative to the size of their gains.
If there is a golden rule of trading, it is these six words: Cut your losses short, let your profits run.
To honor this rule, almost all trades should end in a big win, a small win or a small loss. There should be very few, if any, big losses.
Final thoughts: preserving your trading capital:
Above all else, a trader's key focus should be on preserving their trading capital. Occasionally, there is a surprise news story that causes the price of a stock to drop significantly. When the unexpected happens, you may want to sell first and ask questions later.
Before entering any trade, you should have an answer for two key questions:
1. To preserve my profits, where should I consider selling at least part of my position if the price goes up?
2. To preserve my capital, where will I sell my position if the price drops?
When asking yourself these questions, keep in mind that "your first loss is your best loss."
Source:
https://www.cnbc.com/advertorial/2019/11/12/why-it-may-pay-to-sell-even-at-a-loss.html
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