A TRADE, like every other perishable thing, operates on a distinct and established cycle. Each one is a living entity with an identity all its own.
Life springs up in the strangest of places, and a trading idea is no different. It might come from a fully formed and well-researched hypothesis or on a completely impulsive whim. A trade can be inspired by a personal experience or an emotionless stock screen. It might add to your portfolio’s volatility, or reduce it.
Remember, though, that an oak tree drops thousands of acorns, but only a tiny fraction will ever sprout. And so it goes with building a portfolio. Because nobody can be right all the time, you must scatter your seed far and wide. So find a standard trading unit — somewhere between 2% and 5% of your portfolio, and stick with it. Get used to putting on trades that grow into oak trees, not starting with oaks that may shrivel back into acorns.
When a trade is young and foundering and looking for direction there’s not much we can do for it. And just as every toddler could one day grow up to be president, so does every trade carry the possibility of being the next big thing. (more…)