Thursday, March 15, 2007

Don't Worry About Missing Out on Big Gains

Worrying about missing out on big gains often leads to foolish actions. Whether it is first time home buyers worrying about being "priced out of the market forever" or me a couple of days ago thinking I wasn't taking big enough positions. This led to me breaking my trading rules yesterday - taking on positions in the middle of the day that I wasn't intending to just turn around for a quick scalp but instead hold overnight. My rules say to close trades in the morning and start opening new ones towards the end of the trading day. I kept trying to go short and the market kept rising against me. And I missed the best opportunity to cover my short positions at a profit earlier in the day. I'll close out at least half my position later this morning whether it is profitable or not. The economic releases at 8:30am this morning have pushed the futures into the red from the green so the damage is at least not going to be as bad as it seemed it would at one point I think.

My current goal for trading is to demonstrate that I can consistently generate some level of profits. I don't need to capture all the market movement. But I keep wanting to hedge my investment portfolio against adverse market movements, though that is not my goal for trading - the long-term goal is to generate returns that are uncorrelated with the market (over periods of a month or more - obviously they are highly correlated in the short run as I am taken directional bets on the market). I'm almost half way to my annual goal of $19k in trading profits. I don't need to take big risks as I am earning a salary, I don't depend on trading for a living.

P.S. Great article on the economics of homeownership


Yannick said...

That's certainly a lofty goal. Best of luck! Greed and Fear are probably the biggest enemies of traders. Earning a salary certainly helps you trade more rationally. The current volatility is good for trading. You may well finish your goal before this summer. Right now it's 30% return within 3 months?

Real estate provides an investment less correlated with the stock market. Unfortunately it’s ruined by the buying frenzy for the last ten years and we may not see decent returns within the next 7-8 years. I enjoyed very much the article in the P.S.

mOOm said...

Things were looking good in trading last year a couple of time as well and then I blew up a lot or most of the profits fast. I am getting better though :)

Adventures In Money Making said...

I have 3 points to make:

The "smart money" (don't really know who they are) focus on capital preservation before opportunity cost.

Long Term Capital Mmgmt when BK because they over over-leveraged in non-correlated investments that went south simultaneously! So it might be difficult to acheive total non-correlation with the market.

I didn't understand the math in that article. Specially the 300k on repairs/improvements. I've bought 20 houses and kept a few of them. None of the numbers in the article made sense to me, based on my personal experience.

& congrats on the 9.5K in trading profits!

mOOm said...


There's two sorts of smart money I guess - some is so rich they don't need to take any risk - see Suze Orman. The other is all about assymmetric returns - trying to capture more of the upside and less of the downside than a naive investor - so try to avoid losing money but also don't avoid opportunity. That's where I'm trying to go.

LTCM were betting mainly on spreads between yields on different investments being stationary and eventually converging back to their means as far as I understand and instead risk dramatically increased and all the spreads kept widening. This is what stop-losses are for :) Also see Amaranth!
But it is true that in financial panics correlations increase because money is withdrawn from all risky investments. My trading though is either 100% correlated or -100% correlated to the market. So in the long-run the strategy is uncorrelated. If you are long when the market crashes though that wouldn't be good :) But the strategy would never be long for a significant fall unless it was due to a nuke going off in NYC or something....

I didn't really look at the numbers in that housing article. He covered lots of important economic points that most owner-ocupiers ignore or aren't aware of.