What to Consider before each trade?
Peng Youhang gives us some great insights. This is a great list of questions to consider before each trade. Here are my opinions about each question.
1. How much do you bet on this view (in percentage of your investment capital)?
I believe one should invest consistently with his or her view. It is too hard for me to do it in any other ways. Like the volatility of the market, our thinking has a lot of noises, too. One should not confuse the thinking noises with the true and consistent thoughts. In other words, the thinking noises are highly correlated with the market volatility. The true and consistent thinking should have a low correlation with the market volatility. Recognizing our thinking has Mu and Sigma is one of the most critical steps in trading/investing.
2. What is the probability of your view being right? (of course one can never be sure)
In the United States, one common statistical number is the percentage of divorce rate (approximately 50%). Marriage is a serious thing, at least as serious as investing. Our thinking has a high probability of being wrong or reversed over a period of time. Some times the period of time can be very short. I view my betting probability of being right is roughly 50%. So not loosing much when the right bets turn out being wrong is also critical in investing/trading.
3. What is your stop-loss point? At what point, you have to cut loss and cover? (Even though you may still believe your view is right but you must cut loss to ensure survival).
I do not have a stock-loss per se. However, I believe in another principle of allocating capital among risk-free asset and risky asset. There are two basic principles to me. One is related to sell and another one is related to buy. No matter how high the market is going, you have enough shares to sell if you want to sell. No matter how low the market is going, you have enough cash to buy if you want to. If one can do both for a long time, I believe one would have a totally different view about the market and investing.
4. At what point, do you think you may be totally wrong in your actions and should consider going the opposite way?
At all cost, one should avoid the situation of this condition. One should anticipate these at all times. The goal should be not loosing money. Making money should be just a consequence of not loosing money. Going the opposite way should not happen at all.
5. What is your profit-taking point? Do you increase your position at some point?
Profit-taking or increasing positions should be determined long before the actions are taken. Profit-taking or increasing positions should be default action of some trading/investment strategy, not an ad hoc or impromptu action at the point. The entire art of investing/trading rests on the mastering of this balance.
1. How much do you bet on this view (in percentage of your investment capital)?
I believe one should invest consistently with his or her view. It is too hard for me to do it in any other ways. Like the volatility of the market, our thinking has a lot of noises, too. One should not confuse the thinking noises with the true and consistent thoughts. In other words, the thinking noises are highly correlated with the market volatility. The true and consistent thinking should have a low correlation with the market volatility. Recognizing our thinking has Mu and Sigma is one of the most critical steps in trading/investing.
2. What is the probability of your view being right? (of course one can never be sure)
In the United States, one common statistical number is the percentage of divorce rate (approximately 50%). Marriage is a serious thing, at least as serious as investing. Our thinking has a high probability of being wrong or reversed over a period of time. Some times the period of time can be very short. I view my betting probability of being right is roughly 50%. So not loosing much when the right bets turn out being wrong is also critical in investing/trading.
3. What is your stop-loss point? At what point, you have to cut loss and cover? (Even though you may still believe your view is right but you must cut loss to ensure survival).
I do not have a stock-loss per se. However, I believe in another principle of allocating capital among risk-free asset and risky asset. There are two basic principles to me. One is related to sell and another one is related to buy. No matter how high the market is going, you have enough shares to sell if you want to sell. No matter how low the market is going, you have enough cash to buy if you want to. If one can do both for a long time, I believe one would have a totally different view about the market and investing.
4. At what point, do you think you may be totally wrong in your actions and should consider going the opposite way?
At all cost, one should avoid the situation of this condition. One should anticipate these at all times. The goal should be not loosing money. Making money should be just a consequence of not loosing money. Going the opposite way should not happen at all.
5. What is your profit-taking point? Do you increase your position at some point?
Profit-taking or increasing positions should be determined long before the actions are taken. Profit-taking or increasing positions should be default action of some trading/investment strategy, not an ad hoc or impromptu action at the point. The entire art of investing/trading rests on the mastering of this balance.
posted by Unknown at 11:33 AM
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