Today’s stock market action (February 3rd) is another example of stocks seemingly try to find a floor in this recent period of weakness. Stocks rallied so strongly at month-end that the action had a lot of traders seeing it as a sign that the fall had found a floor. But as usual, the markets tend to fool a majority of the traders time after time. Overnight, with some help from Meta (Facebook-FB) being down a lot after close, stocks started struggling. But hey, who knows where they’ll close?
Source: https://enjoytherideworld.odoo.com/hedging
A long time ago, I went into retirement from being a hedge fund manager and owner of Trendstat Capital. I really had no desire to get back into the day-to-day grind of being a professional money manager. With a retirement account helping to pay for my living expense, I do not ever want to see a significant decline in my assets.
Hedging was the key for my peace of mind. I know that at some point in any decline, my stop sell orders on the hedges are going to be hit. I know that as the market declines, my long positions will get stopped out at some point and I’ll end up slightly short, so I adjust the hedges, taking profit on some of the hedges, so that my portfolio remains in balance. When sooner or later the stock market rallies, I then have a smaller hedge on which will give up some profits while the remaining longs start a renewed run upwards. Of course that is what happens, because I’m hedged! That means in essence that I don’t have a lot of long or short exposure. I’m close to neutral.
The bottom line in all this story is that I created a plan. In UP markets, I go long etfs that my strategy gets me into. In DOWN markets as indicated with my hedge signals, I put on hedges to roughly balance my longs, so I become neutral. As the market falls, I stay on the job as a trader and peel off some hedges as my longs disappear. As the market finally does find a bottom, I try to be neutral. As the market hits the UP direction signal, I take the remaining hedges off and let the remaining horses run with the wind at their back and go looking for new long opportunities. This plan covers all conditions in the market at all times.
A very frequent flaw in many trader’s trading is lacking a complete plan. It has to cover all markets and has to deal successfully with position sizing (Maybe check out my $10 position sizing book?) to keep the portfolio solid at all times. There’s a time to step on the gas and a time to sit and watch. But, no matter where the market takes you having a complete plan and executing it flawlessly gives you the ability to “enjoy the ride!”
This is very well-written and makes total sense to me! Thank you for sharing. Great to see you are now on substack! wmp
Do you agree with Van Tharp that position sizing is the most important factor in trading?