ZF Capital

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Tradecraft – The Sound of One Hand Trading

On July 21, 2010, In Good Articles, by ElfLord

BUYING A STOCK IS EASY. But when it comes to managing a portfolio, it’s usually the follow-up that matters most. Instead of always focusing on taking new positions, successful traders know the real trick is dealing with the ones you already have.

Getting out of a trade, especially at a loss, can be an enormously difficult trigger to pull. Equally thorny is simply standing pat and having the patience to let the market move unfold. Yet knowing when to hold ‘em and when to fold ‘em forms the basic framework on which successful portfolio management is built.

Forget Sharpe ratios and exotic options techniques. In trading, there’s nothing new under the sun. The golden rule — cut your losers and let your winners run — hasn’t changed since the beginning of time. And when following up on a trade, that’s precisely the philosophy that you should engage. Winners are preserved. Losers get kicked to the curb. End of story. (more…)

Tradecraft – Let the Winners Run

On December 7, 2009, In Good Articles, by ElfLord

ODDSMAKERS WILL ALWAYS handicap the favorites. But at the start of every baseball season, all teams — even longtime losers — are contenders.

The same early-season optimism can be found in the stock market, where a new quarter brings opportunity in both new names and old favorites.

As the wheeling-dealing gets underway, investors should approach every trade with the confidence of Warren Buffett and the wisdom of a blackjack dealer, who knows that even the best players have plenty of losing hands. Although most people want to slap a “time horizon” on their trades, the truth is that the market should decide your holding period, not emotions or research. Every long-term investment starts out the same way — as a short-term trade.

In my view, an appropriately sized initial position is no more than 5% of your overall portfolio. Once you get your trade confirmation, all the analyst reports and newsletter recommendations become moot. As we’ve pointed out in the past, after the first trade is made, it’s all in the follow through. Your job isn’t to research, but react. (more…)

Tagged with: letting winners run

Tradecraft – The Money Tree

On November 27, 2009, In Good Articles, by ElfLord

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…)

Tagged with: how to reinvest • letting winners run

Tradecraft – The Rewards of Risk

On November 2, 2009, In Good Articles, by ElfLord

DESPITE HOURS OF THOUGHT, scrutiny and research, I’m humbled to report that the majority of my trades are losers. It’s frustrating…but true. Some trades go against me. Others just go nowhere at all. But either way, my losing trades outnumber my winners.

What saves me, however, is that the profits from my winning trades are bigger than the losses from my losing ones.

Simply put, you don’t have to win more often than you lose. You do, however, need to win bigger than you lose. I have found that when it comes to allocating a portfolio, the old “80-20″ rule tends to apply: 80% of your profits tend to come from 20% of your trades. To that end, the point isn’t to search for trades with a high probability of winning, but with a high probability of a large return. (more…)

Tagged with: letting winners run • managing risk

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Tradecraft – The Sound of One Hand Trading

Tradecraft – Let the Winners Run

Tradecraft – The Money Tree

Tradecraft – The Rewards of Risk

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