What We Already Know

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  • on August 9th, 2011

I took the unusual step this weekend of reading every post on my own site, instead of the usual nourishment I get from others.  The benefit of a digital archive is that I have an organized home for lessons I’ve learned; for years I operated with written notebooks that can be tough to later review.

Just because I wrote something one day doesn’t mean I can’t re-learn the lesson.  While it can be funny(painful?!) to read things written in a different context, what skills are easier to apply than the ones we’ve already applied in the past?  A few of my favorites, and how they’re helping me through this market violence…

1) So You Think You’re a Contrarian? “Since I have a natural aversion to buying after a few up days(and shorting after a few down days), I need objective data to overcome my own faulty reaction”.  Still the case, note my desire to fade this downmove every time it seems “overdone”.  Bad idea…markets offer wicked counter moves to intraday and multi-week selloffs, but multi-day not so much.

2) Built-In Portfolio Protection“dynamic position sizing that forces us into smaller positions when things get volatile”.  Totally relevant, when it comes to sizing the rule of thumb is “big enough to matter, small enough to win”.  With $SPX intraday and intraweek range having doubled and nearly tripled, is there any reason long and short positions shouldn’t be 1/3 to 1/2 of our previous sizing plans?

3) 7 Tips for Using Stop Losses– try Raghee Horner’s use of the term “point of validity” instead of stop loss.  I was stopped out of stocks last week, and have since used only options as they are the only way I can confidently scale into a counter-trend trade in $SPY & $VXX.  They’re dabble trades until the next clear evidence for stocks arrives; no way I’m going to let them have a real impact on my results or psyche.

Like most others, I’m conflicted between the obviously negative climate and the potential for counter-trend rallies from deep in the hole.  The simple exercise of reviewing my own public notes for perspective won’t produce a crystal ball for me or anyone else.  The goal here is to ensure that I’ve protected myself both financially and mentally in what is truly a historic set of conditions.  I can have no way to predict the outcome, but have so far stayed loose enough that I’m excited to attack my setups when they come.  Whether you’re short, long, fade, follow, intraday, long-term…doesn’t matter, the goal is to stay ready.  As David Blair says, can’t worry about the “There It Was” trades when we need to be prepping for the next “There It Is”.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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