Tag Archives: pro

Adding To Positions: A Simple Rule

I want to share a simple rule that has worked well for me over the years. I’ll explain the how and why, and then wrap up with some thoughts about when this rule might not be appropriate. So, imagine you are in a position, and then, for whatever reason, you know it’s right . In fact, it’s so right that it’s time to add to the position, and so you do. Now, think about what happens if the trade turns out to not be right, or to not develop as you expected – what do you do? Here’s the rule: if you add to an existing position and it does not work out as expected, you must get out of more than you added . Simple rule, but effective. To put numbers to the idea, say you are long 5,000 shares of a stock. As the trade moves in your favor, you get a signal to add to the trade (and that “signal” could cover many possibilities.) So, you add 2,000 shares. Somewhere down the road, the trade does not work out, and probably is under the price at which you added. Now, you know the right thing to do is to reduce the position size, and you must do so, but how much do you sell? Answer: more than 2,000, and probably more like 4,000 than 2,100. You now hold less than the original position size, and you’ve booked a loss on part of the position, but you’ve also reduced your risk on a trade that was not developing as you thought it might. One of the classic trading mistakes is to have on a winning trade, add inappropriately, and have that trade become a losing trade. For some traders, being aggressive and pressing when they have a good trade can add to the bottom line, but there is a tradeoff: when you become more aggressive you do so by taking more risk. The psychological swing – going from aggressive to wrong – can be one of the most challenging experiences for a trader, and many mistakes happen in this heightened emotional space. The rule of exiting more than you added is a simple rule, but it protects you from yourself. Now, no rule fits all styles of trading all the time. There could be styles of trading for which this is inappropriate, (for instance, when we add planning to scale in as the trade moves against the entry.) However, for “simple”, directional technical trading, this rule might be helpful in many cases. So much of the task of trading is just about avoiding errors and mistakes, and correct rules lead to good trading.

Everyone Wants To Hit The Long Ball

If you ever go to a golf driving range count the number of people hitting their driver relative to the number of people hitting their pitching wedge. You’ll notice that the vast majority of amateur golfers focus excessively on how far they can hit a golf ball. This makes no sense though. If you’re like most amateurs, you probably have trouble breaking 100. And that means you’re going to pull your driver out of your bag fewer than 15 times including the par 3 holes (unless you’re like me and you regularly keep that driver out to account for Mulligans). The point is, about 15% of your shots will occur with the driver. 85% of your shots will likely occur with an iron or putter. The short game is far more important than the long game. Golfers focus on hitting the long ball because it is a greater form of instant gratification. It’s the what have you done for me lately effect. A golf round can last for 3, 4, 5 or 6 hours. A few moments of instant gratification can make a seemingly arduous day appear worthwhile. Of course, this is precisely the wrong way to win these games. You win by doing lots of little things right and avoiding big mistakes. Ironically, going for the long ball increases the odds of making big mistakes, which increases your chances of performing poorly. The investing corollary is the constant reach for the next Apple (NASDAQ: AAPL ), the next Microsoft (NASDAQ: MSFT ), the “market beating” fund manager or what Peter Lynch called the “10 bagger.” This chase is as alluring as the long ball in golf. And it’s just as destructive. But like most amateur golfers, the average amateur investor doesn’t fully realize that what they’re often doing here is increasing the odds of making big mistakes in their portfolios rather than increasing the odds of winning (achieving their financial goals). For most of us, achieving our financial goals has nothing to do with finding the next Apple, “beating the market” or landing the next 10 bagger. For most people, allocating their savings boils down to two simple goals: Maintaining your purchasing power. Avoiding an excessive amount of permanent loss risk. But the allure of the long ball and instant gratification is often too enticing to ignore. And so we keep pulling out that driver. Again and again and again.

November 2015 U.S. Fund Flows Summary

By Tom Roseen For the third month in four investors were net redeemers of fund assets, withdrawing $19.1 billion from the conventional funds business (excluding ETFs) for November. For the fifth consecutive month stock & mixed-asset funds suffered net redemptions, handing back some $24.0 billion for November (their largest net redemption since December 2014), while for the fifth month in six fund investors were net sellers of fixed income funds, removing $3.9 billion from the macro-group for November. For the second month in a row money market funds witnessed net inflows, taking in $8.8 billion for November. Despite a better-than-expected jobs report at the beginning of November, M&A news in the biotech industry, and a jump in financials, investors remained wary during the month in anticipation of the Federal Reserve’s raising interest rates in December. The Labor Department said the U.S. economy added 271,000 jobs for October-above the consensus-expected 185,000. Softer European Union gross domestic product data, weak economic reports from China, and worse-than-expected retail sales data mid-month led to one of the largest weekly losses in months. A large slide in oil prices placed a further pall over equities. However, comments by Fed policy makers indicating they would raise interest rates in a slow and careful manner, accompanied by news that the European Central Bank (ECB) will combat low inflation by deploying stimulus measures in December, helped ease investors’ concerns, leading to one of the largest weekly gains in the S&P 500 in almost a year. Strong earnings reports and an increase in quarterly dividends from the likes of Intuit and Nike were offset by news of slowing growth in emerging markets and by ongoing geopolitical concerns. Energy and mining shares were hit particularly hard during the month as concerns over excessive oil supplies and disappointing Chinese economic data played on investor psyche. The Mixed-Asset Funds macro-classification (+$4.5 billion) attracted the only net inflows of Lipper’s five equity macro-classifications, while USDE funds experienced the largest outflows (-$23.1 billion). Large-cap funds (-$9.3 billion) suffered the largest monthly net redemptions of the capitalization groupings for the fourth consecutive month. Again, in contrast to its open-end fund counterpart, the ETF universe witnessed its tenth consecutive month of net inflows, taking in $24.1 billion for November. For the third month in a row authorized participants (APs) were net purchasers of equity ETFs-injecting $23.7 billion (their largest net inflows since March), and for the fifth month in a row they were also net purchasers of bond ETFs-although injecting only $0.5 billion for November. Surrounded by uncertainty and looking for greater clarity by the ECB on its proposed monetary easing, for the fourth month in five APs’ appetite for USDE ETFs topped that for all other types of equity ETFs. The macro-classification witnessed the strongest net inflows (+$14.1 billion) of Lipper’s five equity-related macro-classifications, followed by World Equity ETFs (+$5.7 billion), Sector Equity ETFs (+$4.4 billion), and Mixed-Asset ETFs (+$0.3 billion). The Alternatives ETFs macro-classification (-$0.8 billion) suffered the only net outflows for the month. If you’d like to read the entire November 2015 FundFlows Insight Report with all its tables and charts, please click here .