I simply cannot buy into this market or whatever stock you are considering. Why? Is it fear of loss or is it fear of a huge devastating loss? Fear of Ruin? Let’s boil it down to fear.
I know that many (maybe here as well) handle this fear by trading very short term even day trading. That is the fear of tomorrow and as I state often no one knows what tomorrow holds, no one. I very rarely ask this of people but if you are one of those day traders or very short term traders, have you ever looked back at your trades and analyzed what would have happened had I allowed more time, held on a bit longer? Why not go back and analyze 🙂
OK so you are a normal intermediate term or swing trader. You are scared now because prices are so high, right? Regardless of what the near term holds we both know that prices can go a lot higher before any correction or bear market takes hold. Do you also have the fear of missing out?
Let’s see if we can challenge this fear and put it in its place. Let’s say you have a 100K account. Decide here and now how much of that account you are willing to risk on any one trade. Maybe it’s 1% or 5% or even larger. That’s the risk your willing to accept regardless of where the averages or stocks you are following are. Victor Sperandeo uses 3% of his account size as the risk parameter of any one position. On a $100,000 account that risk would be $3,000.
If we lose on the first trade the account size would then be $97,000 which means that the new 3% threshold would be $97,000 times .03 or $2,910 and not the $3,000 from above. If you extend this line of thinking you could be wrong 33 consecutive times and still have $40,000 remaining to rebuild. I would of course submit that being wrong 33 consecutive times is an extremely unlikely event.
Step one is to decide you are going to buy or short a stock or ETF. Step two is to have an initial exit strategy when entering. The buy price minus the exit strategy is your position risk. The 3% value of your account is then divided by the position risk to determine the number of shares you can buy following this money management technique.
Tomorrow I will translate what I’ve written into examples from the systems I publish to show what I mean. For today I would like you to ponder what I have just said.
Talking Points and Aereo vs. Broadcasters: Do Either Have a Plan B?:
Your taxes are going up. You just don’t know it yet. (Wonkblog)
Why Behavioral Economics Is Cool, and I’m Not (Huffington Post)
The Debate over Student Loans: The Issue Is Not the Issue (Econospeak)
Say No Without Burning Bridges (HBR)
Bubble Bubble Toil & Trouble (Market Anthropology)
Corporate pension funds and university endowments have missed out on much of the rally for stocks. (WSJ)
Is Math Liberal? (Mother Jones)
The Shadow Internet That’s 100 Times Faster Than Google Fiber (Wired)
Shut Up, Have a Cheeseburger (National Review)
The stock-market herd: How to think about investing when prices are this high. (WSJ)
Millennials Skip the Ring and Mortgage (Bloomberg View)
Are investors really holding lots of cash? (Horan Capital Investors)
Why Is Dubai’s Stock Market Crashing? (Business Week)
How to Lose $1 Billion: Yeshiva University Blows Its Future on Loser Hedge Funds (Take Part)
Nine Habits You Need to Stop Now (Farnam Street)
Robot Doctors, Online Lawyers and Automated Architects: the Future of the Professions? (The Guardian)
A Brief History of Apple’s iWatch (Dashes)
Aereo vs. Broadcasters: Do Either Have a Plan B?
Have A Great Day