Trading horizon
I nearly covered a shorting position with a limit today but cancelled it. The day was good and my portfolio is up 53.7%. One of the short positions is now top on the list in terms of dollar gain, though not percentage gain.
Shorting and trading, by their very nature are shorter-term positions as compared to investments. It is quite difficult to be able to hold on to a shorting position for a few days. For some traders it can be a nerve-wracking experience, especially if the threat of a short squeeze looms, where the potential for losses is unlimited. Therefore, level-headedness is of the essence.
The trade must be well-researched, and requisites for a good trade must be fulfilled: entry, exit, % of bankroll risked, stops or limits.
I believe you should forget about a short trade which was profitable when covered in the following sense: “You should have no regret about any other action which could have brought more profits.”
This said, it is important to have a trading journal where trades can be stored and analyzed.
Value Investing
Buy-and-hold and regular investing with DRIP can bring some peace of mind to the Trader/Investor, but in some market conditions it can be much more nerve-wracking than holding on a short.
Consider Buffett seeing his portfolio literally melt by $25 billion during the global economic crisis and still keeping at it. There is simply no way that he could not be affected by this stupendous loss unless he really doesn’t look at his portfolio at all.
In addition, it was possible as I showed in this blog to call the massive losses in the market months before October 2008. With such a large exposure to market and systemic risk, one could have cashed in, or done like Paulson and make the Greatest Trade Ever – as it is, the title of a new book by Gregory Zuckerman:
Trend-following
My thoughts on trend-following are related to the amplification effect of people using this strategy. Moreover, these strategies can also be set and triggered in an automated way.
With the tendency to go more towards automation, thus removing the deleterious effects of human emotions on trading, I can only foresee that similar strategies and systems will cause charts to spike one way or the other, with the amplitudes getting higher with time.
It would be interesting to model these changes, and build meta-strategies to profit from these trends.
A book I recommend on Trend Following is the one by Michael Covel:
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