Opening Position
September 2009
Preservation of capital: these are words we hear over and over again but don’t give it a second thought, even though we should. That’s because we think we already know all about it and already apply it to our trading. But do we? In reality, it is one of the most important aspects of trading. The financial market is a risky playing field, whether you are investing or trading. It may appear to be more forgiving for longer-term investors, but that depends on how much of a time frame you have in order to see those numbers turn positive. The recent crisis in the financial markets made some learn the hard way. Even though we are now seeing signs of upside movement in the broader indexes, there is no way of knowing if it will sustain, and for how long. And this is exactly why it is important to apply sound money management strategies to your trading.
It is easy to forget negative outcomes when you see the markets move above short-term, medium-term, and long-term moving averages. You get tempted to enter long positions with the mindset that nothing could go wrong with your analysis. Your only thought is to exit the position once prices fall below the moving averages or the moving averages start trending down. But what if prices reversed soon after you made your long entry? Did you consider the probability of that ever happening? Did you think that you could be wrong?
Trading is not about being right or wrong, or about picking tops and bottoms. The market is the one that is always right, and you have to follow the market and try to get a piece of it.
There is no way you can predict what the market is going to do. All you know is what the market has done, and that is what will help you determine the probability of the market moving in a particular direction. But that probability is never going to be 100%, which is why you must create a system or methodology that will limit your losses. You can create as complex a trading system as you want, but if it doesn’t include objective exit strategies, all your efforts will be wasted. Only if you have objective exit strategies will you be able to have the discipline to follow your trading system.
When it comes to money management, there are several variables you have to pay attention to. These include the placement of stops, position sizing, scaling in and out of positions, and risk management, among others. In this issue of Stocks & Commodities, you will find articles that discuss these various components of money management. Incorporating these components into your trading systems, I am sure, will lead to superior trading results.
Jayanthi Gopalakrishnan, Editor