Brexit Aftermath

I don't try to predict what markets will do. I live in the world of risk/reward paradigm.

I follow markets and place bets when I see favorable situations. To me, a favorable situation is one where I can bet a little and make a lot.   

It's not really the market ‘set-ups’ that make me money. The main driver is the respect for risk--which, in the long run, creates a market edge when applied to the ‘set-ups.’

Regardless of what direction I’m betting on, my market positions will reflect an aversion for large losses and an optimistic outlook on large returns.   

In my observation, the main stock market indices(DJIA, S&P500, NASDAQ) are moving to the downside.

From a technical view, there is essentially nothing stopping the DJIA from revisiting the August and January lows. There is a potential price vacuum from DJIA 17,000 to 16,000--I believe it's the path of least resistance.

And this 1000-point move can happen in short order.  

This is the main opportunity--DJIA 1000 points to the downside.

But this opportunity alone is useless if I can’t get a good ‘set-up’ and a good deal playing it.

If I’m wrong, and the DJIA shoots right back to 18,000, I don't want to lose much.   

I don’t like to bet directly on the indices.

I like to use the them as a weathervane. Once I have a general idea of the direction I want to bet on, I identify sectors that I believe are headed lower. Within the sectors, I’ll select the individual stocks that present the very best opportunity.

In this situation, I want to exploit a market downside by buying out-of-the-money puts. Namely on stocks that are currently moving in a downward direction, have trading volume of 1,000,000+(liquidity), and provide a disproportionately favorable risk/reward paradigm(cheap contract prices relative to a stock’s potential price discovery).

I will likely be wrong on most of my trades. But I want the potential to get 10X, 20X, and 30X my money on some of my trades. Simultaneously, I want to keep my exposure to the market small relative to my assets in my portfolio.   

The options market is tough. It took me a few years to really get the basics. You can only learn by doing--no amount of explanation will truly prepare you.  

There is opportunity for those who know where to look and how to respect risk. 30-to-1 payouts exist in markets. These payouts go to those who are prepared for them. If you do not believe that you can capture wins of this magnitude, your market decision will reflect that belief, and the right habits will never develop. In this sense, we all create our own destiny in markets.   

Trading in markets is a personal journey. But once the foundation is formed, you can take ideas from everywhere and process them through your system.   

Brexit Aftermath

I don't try to predict what markets will do. I live in the world of risk/reward paradigm.

I follow markets and place bets when I see favorable situations. To me, a favorable situation is one where I can bet a little and make a lot.   

It's not really the market ‘set-ups’ that make me money. The main driver is the respect for risk--which, in the long run, creates a market edge when applied to the ‘set-ups.’

Regardless of what direction I’m betting on, my market positions will reflect an aversion for large losses and an optimistic outlook on large returns.   

In my observation, the main stock market indices(DJIA, S&P500, NASDAQ) are moving to the downside.

From a technical view, there is essentially nothing stopping the DJIA from revisiting the August and January lows. There is a potential price vacuum from DJIA 17,000 to 16,000--I believe it's the path of least resistance.

And this 1000-point move can happen in short order.  

This is the main opportunity--DJIA 1000 points to the downside.

But this opportunity alone is useless if I can’t get a good ‘set-up’ and a good deal playing it.

If I’m wrong, and the DJIA shoots right back to 18,000, I don't want to lose much.   

I don’t like to bet directly on the indices.

I like to use the them as a weathervane. Once I have a general idea of the direction I want to bet on, I identify sectors that I believe are headed lower. Within the sectors, I’ll select the individual stocks that present the very best opportunity.

In this situation, I want to exploit a market downside by buying out-of-the-money puts. Namely on stocks that are currently moving in a downward direction, have trading volume of 1,000,000+(liquidity), and provide a disproportionately favorable risk/reward paradigm(cheap contract prices relative to a stock’s potential price discovery).

I will likely be wrong on most of my trades. But I want the potential to get 10X, 20X, and 30X my money on some of my trades. Simultaneously, I want to keep my exposure to the market small relative to my assets in my portfolio.   

The options market is tough. It took me a few years to really get the basics. You can only learn by doing--no amount of explanation will truly prepare you.  

There is opportunity for those who know where to look and how to respect risk. 30-to-1 payouts exist in markets. These payouts go to those who are prepared for them. If you do not believe that you can capture wins of this magnitude, your market decision will reflect that belief, and the right habits will never develop. In this sense, we all create our own destiny in markets.   

Trading in markets is a personal journey. But once the foundation is formed, you can take ideas from everywhere and process them through your system.   

Ray Dalio and The Economic Machine

Below is a link to an animated YouTube video of Ray Dalio explaining his belief about markets. The guy is worth about $15 Billion and he runs a $150 Billion hedge fund. He seems to be generous with his thoughts as the video is super informative.

How the Economic Machine Works

Fear of the Markets

In Jack Schwager’s Market Wizards, a common theme amongst traders is a genuine fear of the markets. I’ve chosen two quotes from the book that I believe best exemplify how market fear fuels trading philosophy.

1: “I am more scared now than I was at any point since I began trading, because I recognize how ephemeral success can be in this business. I know that to be successful, I have to be frightened. My biggest hits have always come after I have had a great period and start to think that I knew something.”

-Paul Tudor Jones

2: “I have found that the greatest traders are the ones who are most afraid of the markets. My fear of the markets has forced me to hone my timing with great precision. When I am trading properly, it is like a pool player running racks. If my gut feel of market conditions is not right, I don’t trade. My timing is a combination of experience and my nervous system. If my nervous system tells me to get out of the position, it is because the market action triggers something in my knowledge and experience that I have seen before.

I also don’t lose much on my trades, because I wait for the exact right moment. Most people will not wait for the environment to tip itself off. They will walk into the forest when it is still dark, while I wait until it gets light. Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading.”

-Mark Weinstein

Avoid This Basic Mistake…

When I look back on all my biggest losing trades from past years, I either risked way too much on an initial buy, averaged my losers, or didn't plan an exit before an entry...or worse, did all three together.

Baby Steps Toward Success:

Planning for an exit before an entry will save your butt.

Shown below are some stocks that could have hurt investors/traders in the past years. However, with prudent initial risk, and a predetermined exit, participants would have side-stepped disaster.    

While trading individual stocks, I believe there is no need to let falling prices unnecessarily corrode capital. I'd prefer to exit a position with a small loss than a huge loss.

Novice players often say to themselves: “I’ll sell when it gets back to even.” Even may never come. Or worse--they will buy more stock as prices go down, because if it was good at $70, it has to be great at $50, and even better at $30--😬 Quick path to large losses.

Now the important question is, “How do I determine my exit strategy before I buy?” If you are pondering this question, you are on the right path.