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#1 07-03-2021 17:41:04

johnedward
Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3054
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Successful trading: 3 principles to improve profitability, reduce risk

Successful trading: 3 principles to improve profitability and reduce risks


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What brings success in trading? There are many different theories, strategies, tactics, opinions, and ideas about what successful trading is.

The aim of this article is to summarise the basic principles that help improve returns and reduce risk.

What should we learn (or reaffirm) from recent events?

Last year was an eventful year for global markets and economies. It is a year that will be the subject of various reflections for decades, strongly linked to the virus situation. The virus has been and still is a major driver of economies and policy responses globally.

It reaffirmed the importance of monitoring risks.

People are generally not afraid of what they have never experienced before, even though it has happened in other lives and in other societies.

By the start of the pandemic, markets had recovered from the initial slight dip in the Covid-19 pandemic, mostly believing it was going to reverse itself, essentially applying some sort of SARS heuristic for its effect on the markets back in 2003.

Things were going well then, and the picture of a pandemic that could shut down much of various major economies was worse than most people had experienced in their lifetime and seemed implausible.

Markets were trading at unprecedented levels. 2019 was a bumper year for the markets, as central banks moved from a tightening stance to one of easing prejudice. Valuations were high and political room for maneuver was minimal in all of the major reserve currencies.

Last year began as a continuation and extrapolation of this environment.

#1: Extrapolation is dangerous

People tend to extrapolate what they are used to.

Therefore, after a period of a certain type of behaviour and results observed in the markets, it is likely that these results will be extrapolated in advance and expected in the markets.

For example, most will think that investment assets that have performed well in the recent past are good investments rather than more expensive investments. So they tend to buy closer to the highs and sell near the lows.

This is one of the most common and perhaps the most dangerous mistakes.

Conversely, a good rebalancing of assets - that is, selling those that have done well and buying those that have not done so well in order to bring assets closer to the target mix - is likely to ''increase returns and reduce risk".

The big change in expectations, when entire swathes of the economy were shut down and many people lost their income, resulted in a more violent sell-off than that seen in 2008 and 1929.

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#2: Distinguish the possibilities from the probabilities

Some events are rare, but they do happen.

Trading is heavily focused on probabilities, expected values ​​and distributions.

Almost anything is possible. It's the odds that count.

Certain events - for example, natural disasters, pandemics, unexpected armed conflicts, major disruptions in the supply chain of strategically important goods (e.g. oil), bubbles (and their bursting) - are always at the origin of your distributions.

Some people were saying that closing the stock markets would help when the virus situation brought a new reality to the big global economies.

They have tried this in some countries - like the Philippines - only to see the stock market plummet by 25% when it reopened.

Some believe that closing the markets would calm nervousness, restore confidence and the problems would go away.

The problem is, while people are confident, some buyers did not have the money and credit to purchase the massive amount of assets that were on sale.

#3: Reduce the risk of leakage

It is extremely important to reduce the risk of loss in your portfolio. What takes a long time to build can be erased very quickly if you're not careful.

If you have a 50% drawdown, you need a 100% payout to get back to where you left off. If you have an 80% drawdown, you need a 5x return to come back.

Big losses are not outweighed by big gains. The greater the drawdown, the greater the gain required.

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"Anything worth having is worth going for - all the way." - J.R. Ewing

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