Friday, October 17, 2008

Answering an excellent comment

I receive many excellent comments which I always enjoy reading. An excellent comment by Chris, in response to my recent posting on recent mistakes, required a response in a post:

Just a thought here: Perhaps a narrower focus on fewer trading vehicles would benefit you.

I am not currently a trader, but did try a couple years ago at swing trading while trying to maintain a day job during market hours. I found it impossible to do because I hyper analysed every facet of an index/etf etc. trying to maximize my profit while cutting risk. The point you make about imperfect hedging reminds me a lot about of techniques I tried.

Anyway, if I was going to take a stab at it again, which I hope to do some day, I would want to focus on three vehicles: outright index futures, sectoral ETF paired trades, and reasonably straight forward option spread strategies.

It just seemed to me from reading the post that you maybe were losing sight of the goal which is to make money, rather than be perfectly right on how things move.

I hope you interpret this more as empathising rather than criticizing. Thanks for the blog.

Chris
Vancouver

Chris, thank you so much for the post and I do not take it as criticism.

Thankfully, I am up quite nicely in this vicious bear market, albeit not as much as I should be.

My first goal (and easily the most important) in a bear market is: Capital preservation

My second goal in a bear market is to make some money. Goal #2 can sometimes conflict with Goal #1 and therefore, it is important for me to follow the motto "Discipline over conviction" that I have learned from supertrader Todd Harrison over at Minyanville.com.

(By the way, these goals were developed in reaction to my experience in the 2000/02 bear market, but that is another story for another time that I will try to share one day. Suffice to say, I believe I have learned my lesson.)

This second goal has caused the mistakes mentioned but more importantly, it has also kept me from getting killed in the bull stampedes that result in a bear market (such as Monday's 11% gain on the Dow; TSX 18% gain Tuesday morning). I try to not allow positions to go against me double digits, although I do allow a little more risk tolerance for deeply held convinctions for long term positions (such as shorting financials in Sept 2007- I was early by a month or so and watched the position go against me by about 20% as Bernanke cut rates).

In this post, I illustrated these mistakes partly for therapeutic reasons as this market is tough with 9-10% intraday swings. Many pros that are leagues ahead of me in trading skills are finding this market the toughest of their lives. The other reason was that I wanted the reader to understand that I am not always right. I have many posts where I "brag" about a good prediction. This year, my predictions have been fairly accurate but that has not and will not always be the case.

I do agree with Chris that especially if this is not your full-time vocation, that a narrower focus on fewer trading vehicles is good, and I have been and will continue to try to keep this focus. The only problem with too narrow a focus is the lack of diversification and potentially greater risk. I have tried to cut the number of positions, but as you can probably tell from my blog, I have many ideas/predictions and it hurts me to see things go according to plan without being on board (case in point: Oil is now at $70). He also makes smart mention of imperfect hedging and I will try to heed the lessons of my HGD "mistake", which has been recently compounded by selling HGD on Wednesday ahead of its 20% rise on Thursday-Friday.

I made mistakes as mentioned in the post. I did not mention the successes which have been holding some of my cash in US dollars and some timely puts on C, MBI, MER and AIG back in August.

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