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Market Skill-Builder
Financial Markets & Financial Software The Skill-Builder for Financial Trading - Financial Training Software.

Trading / Investing : Strategic Considerations

The type of trading advocated here is designed to permit rapid capital expansion while guarding against the risk of ruin.

To be successful in the markets over the long-term a trader must have a winning strategy, and apply it consistently. A winning strategy :

That much seems obvious (at least to me), but a very large proportion of traders and investors fail to make these definitions. They buy things they think (or are advised) are likely to go up; watch them start to go down; then think "Oh #@#?! (supply your own preferred expression of disgust) - what shall I do now ?". This is not the way to succeed.

I recall a converstaion with a very well known and respected market commentator: he was very taken aback by my observation that trading should be extremely boring. "How can that be!? - all of life's rich tapestry is reflected in market action etc. etc.". Very true, but if you want to make money in the markets all you do is look for a few simple repetitive patterns and act on them when they appear. Very tedious, but then excited traders do not win over the long term (any more than excited poker players do).

Trading Vs "Portfolio Management"

The classic response to dealing with market uncertainty is, of course, to diversify. An un-leveraged diversified portfolio will never disappear altogether (unless either the financial intermediary with whom it is placed disappears or the entire financial system collapses). It is, however very unlikely to expand faster than (or even as fast as) the underlying market averages. If the objective is capital expansion (as well as conservation), it seems to me that rather than diversifying, it is more rational to place the bulk of capital in ultra-safe relatively short-term government paper, thus guaranteeing capital conservation, and using the balance to finance a small number of "at risk" positions with a view to capital expansion.

A portfolio containing 90% zero-risk and 10% high-risk components is safer than one containing 100% diversified medium-risk investments if only because all one's attention can then be concentrated on managing the 10% high-risk element.

"Exposure Management"

A brief word about corporate market exposures: Most corporations with currency and commodity market exposures have policies regarding the resulting market activity which are designed to limit the attendant risk of loss. Many do not (or do but fail to police them adequately) - which is why spectacular, sometimes crippling, losses are announced and widely reported by one company or another at approximately 6-monthly intervals.

In general terms, selective hedging is usually thought to be "OK", trading for profit is frequently forbidden. A more rational approach is to:

The advantages of separating these activities are obvious. "Selective hedging" is ridiculous (a) because it is trading with one hand tied behind the trader's back (selective hedgers play only one side of the market) and (b) because it tends to generate internal conflict and unclear reporting (a hedge which cost money was someone else's stupid mistake, one which made money a master-stroke for which everyone seeks to take the credit).

Next, Technical Analysis / Trading : introduction. Go there
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Financial Markets & Financial Software. The Skill-Builder for Financial Trading - Financial Training Software.