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Short
Term Strategies |
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The majority
of short term strategies are of investors who look to day trading to replace their day job. Not a bad idea but
unfortunately most short term traders come to the market with very
little money, take huge risks, and it's only a matter of time
before they crash.
In order
for you to consistently make money as an investor it's
important to have a winning strategy, but first and foremost you must
manage your expectations. 20%-30% a year is all I
shoot for
in my personal investments, and with my capital I am able
to live off my investments. If, on the other hand, you
have, let's say $100,000 in capital, it is
going to be tough to live off a 30% ROI, or $30.000 a year
regardless of the fact that it is a wonderful ROI.
In trying
to cut corners, short term traders use excessive margin or choose extremely
volatile stocks as a means of maximizing returns. Unfortunately,
the minute the market becomes difficult and goes against them,
the losses are inevitable. If there
is one thing I want to impress upon you, it is that there
are no short cuts in money management. Probably 95% of all short term traders end up
losing money. Why waste your future?
Tons of people lose
serious money in short term strategies. Take for example the
stop loss order rule. The original idea was to protect
investors from losing money to bad investments. Sounds
reasonable, but in reality stop losses had a major impact on how
investors operate. Instead of evaluating investments based on
value, the concept now is, "Let's just buy it, and if it falls I
will just lose 10% as my stop loss gets hit". The most common
statement you hear from option players is the following, instead
of risking $40,000 I will just put up $4,000, and if I am wrong
all I can lose is $4,000. The problem with this kind of
thinking is that instead of accumulating winners, you are
creating a system biased toward accumulating losses. |
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The stock market is an
enticing trap. It is so easy to get disillusioned, it's
almost like a game in the game room where it looks so
easy, you just have to try it. In reality, after you
spend your quarter you realize the machine is rigged
against you. The same phenomenon occurs in short term
strategies. On the surface you see stocks making huge
gains right in front of your eyes. In reality when you
actually buy the stock the outcome is different. Is
there more here than meets the eye?
In actual fact, short-term
strategies have the potential to be far more lucrative
than long-term plays. The mathematical reasoning is
simple: a stock that moves from 40 to 80 over the course
of a year or two makes 40 points for a buy-and-hold type
investor, but can make hundreds of points for an
in-and-out investor because of the constant
advancement/retrenchment in stock price that occurs
along the way.
For a trader with perfect
timing, the theoretically maximum profit potential is
the length of the zigzag curve between the starting and
ending points of the price curve. The more volatile the
curve, the greater its length and profit potential (but
the sharper one's timing must be to achieve this).
Suppose the length of the
price curve in moving from 40 to 80 over the course of a
year was 1,000 points. This means that there was a total
of 520 points of up movement and 480 points of down
movement that occurred along the way. The perfect
two-way trader who correctly called every move could
thus make $1,000, while the one-way trader who
restricted him- or herself to long positions only could
thus make $520 (ignoring the impact of commissions).
There are extremely few
traders (if any) outside the trading floor with timing
skills good enough to achieve or even approach such
results. By the way, before you conclude that only God
can be the perfect trader, note that market makers and
specialists in NYSE and AMEX listed stocks do achieve
such results, for the reasons that: (i) they are the
enforced buyer to every seller at the trough, (ii) they
are the enforced seller to every buyer at the peak, and
(iii) because their order book tells them precisely when
each trough and peak is occurring through the day.
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