Friday, 8 April 2011

Purple Crayon

Some comments from Jeff Macke that pertain to sports trading as well as the financial markets:

I've been a puppet, a pirate, a pauper, a poet, a pawn and a king. Also a few other things, among which are trader and pundit.

Let me push you up my learning curve and, hopefully, prevent you from paying too much tuition in the school of hard knocks. Being a puppet, pirate, pauper or pawn is terrible. Being a poet can be fun, but the pay is lousy. Being king, by which I mean you are good at what you do, are in control of your own destiny to the extent life allows such control, and you have enough in the bank so you're much more than one missed paycheck away from being forced into pauper-hood.

There are two things you need to know about the relationship between the kingdoms of punditry and trading. First, when you suggest selling assets in the midst of glorious rallies, viewers and readers get very, very upset. Second, traders make the bulk of their money trading against people who let being upset control their decision-making. That's not a moral judgement; trading isn't exactly roaming the earth bathing lepers in terms of adding value to society. Feeding on the weak and emotional is simply how life in the trading pit works.

Smart traders accept in advance that some trades are going to go horribly wrong and prepare their exit in advance. For me that means always, always, knowing the price at which I'm a seller. "Higher" is a fine upside target, but "lower" is a totally unacceptable exit plan. That's why I'm always asking "Breakout" guests what negative price or scenario would cause them to get out of a position -- not because I'm mean but because controlling your downside is the only way to trade profitably over the long term. I'm simply not going to let anyone tell viewers otherwise as long as I'm on the "Breakout" set.

My personal trade exigency plan for 90% of my holdings is literally as simple as I can make it. I draw a trendline and sell if the price falls below the line. Watch the video, and you'll know how I go about it. I kick myself, hard, when I'm wrong, but I don't question my process. In my world the market is never "stupid," I'm never "in for the long term" and I don't tell myself nonsense like "you never take a loss until you sell." I try to win and to bail quick when I lose.

To quote Huey "The Kingfish" Long, one of the great, albeit corrupt and misguided, political kings in American history: "Every man or woman can be king." It's simply a matter of staying alive and in the arena. After years over-thinking it, I realized I could limit my downside on literally any position for the price of a ruler and a box of crayons.

You can use your own system. My purple crayon has worked for me. If it stops working, I won't take it personally. I'll simply try to figure out something else.

1 comment:

Baz said...

Sometime back you mentioned looking for a site giving MLB pointers and I wondered if you had any luck and if you have tried He picks home dogs, most seem to be odds against and last season I had some decent wins following him.
Many thanks for your blog its a good read.