Over the past month we’ve discussed in broad terms the notion of trading stocks for a living. As we stated in Becoming an Independent Equity Trader, and then again in Short Sellers Disappeared? Time to Short, it’s by no means an impossible task. So long as you’re a fella who has his wits about him and can adhere to a self-imposed discipline, you can likely make a successful go against the horde of math PhDs and trading algorithms of the Wall Street stalker set.
You would need the appropriate tool kit, of course, and you’ll have to be proficient in employing it – as you would in any endeavor. But the bottom line is plain: it can be done.
In our last discussion, we outlined the pyramid upon which successful trading depends, noting that without proper attention to:
- a) system signals,
- b) proper money management principles, and
- c) psychology
there’s little hope an individual will consistently make money in the trading game.
‘System signals’ was covered summarily in our January 19th letter. And today, we briefly explain the need for proper a money management regimen.
We should interject at this point that our ultimate goal is to provide you with a thoroughgoing and user-friendly methodology for ‘Trading the Normandy Way’, but at this point, we’re still gauging subscriber interest. If you’d like to write us to express your feelings on the subject, we’re always game for suggestions and guidance.
Lay it on us.
For many active traders, there’s no aspect of the work so important as managing their funds. It’s actually the subject of entire books, so you’ll excuse our cursory treatment of it here. As we mentioned a moment ago, we plan a more methodical offering in the near future.
Money management, like trading signals, is, in the end, about curbing risk – both catastrophic risk as well that which comes from having your capital bled dry by a thousand paper-cut losses.
To make the concept clearer, we repost the colorful blue signage we first offered back on January 19th.
It looked like this –
(We add the words ‘his system’ today so you won’t be left completely in the dark.)
Translation: Your gains have to outweigh your losses or else you don’t have much of a system.
That much is clear.
Money management enters the picture to ensure that there’s still some capital left after a string of losers take their bite.
Because every system produces losing trades.
In light of that, one is obligated to commit the appropriate amount of capital to each trade to avoid 1) taking a catastrophic loss, which is not only a career ending event, but in many cases also means the end of the individual as we know him. Too many a broke lad or lassie has fallen into a deep depression after losing the lion’s share of his capital, never to return to normal function again. We’ve seen it often enough to warn that you cannot afford to let this happen.
Proper cash allocation practices also insure that a system’s inevitable losses will not overwhelm his winners. That is, if the losers are closed out in a timely fashion (according to the strict trade signals by which one trades) and the winners are left to run until those same signals indicate it’s time to take a profit, the net winnings of the system should produce a return that’s worth at least the time spent to acquire it.
Additionally, if the proper research is undertaken, a diligent trader can discern with a good degree of accuracy what sort of win/loss ratio his system will produce. And that knowledge will help him to calculate an appropriate cash management/trade allotment regimen.
And that’s where it ends for this week, race fans. We’ll have more to say about trade signals and cash management in coming letters. In the meantime, please take a moment to write us with your thoughts on the program, and stay tuned for the third part of our Independent Equity Trader overview, coming soon.
This Week’s Trade
We’ve got two sectors to examine today, one is the retailers and the other the techs. But first, take a look at some sentiment figures.
The first comes to you from the people at Gallup, who daily monitor the economic expectations of Americans from all backgrounds and socio-economic strata.
And this is what they found –
In a word, the latest sentiment numbers reveal a record-breaking, over-the-top optimism, the likes of which have not been seen since the giddy-up folk started randomly dialing the country’s hoi-polloi.
And it doesn’t end there. The folks who write financial newsletters are also extraordinarily bullish, according to the latest figures from Investors Intelligence.
This is how their ‘Advisors Sentiment’ chart looks of late –
The chart makes clear that folks like us, in the business of helping you make money, have only once in the past seven years been so excited about equities.
What to do?
At times like this we respond with two distinct approaches.
In the main, we bias ourselves in favor of a near term correction, however deep, that we expect to transpire in the coming ten weeks.
We also look to pair the best performing sector against its worst performing colleague, going short the first and long the second, with the expectation that a sector rotation will be in the cards that favors the weak over the strong.
As mentioned above, the techs have held the upper hand of late, while the retailers have looked weak – technically sound, mind you, but relative to the techs, no more than a whiff of cow methane.
Here’s the way it looks –
The NASDAQ 100 (NDX) has pulled away smartly from the VanEck Vectors Retail ETF (NYSE:RTH), and we believe the gap has to narrow.
But we’re going one step further and playing the most extended of the techs, Apple (NASDAQ:AAPL) against the retailer we believe has the best prospects for the next six months, Kohl’s (NYSE:KSS).- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,