If you invested $10,000 in what you thought was a sure thing, and you lose 30% on the trade, you are down $3,000. What if this happens multiple times? You could lose $9,000 more or less on just three bad trades.
I also have real examples to prove this from the stock market of September-October 2011. ERX, the triple energy ETF, was selling in the $44 range around the middle of September. It was down almost 50% from its high of $85. It seemed like the bottom was somewhere in the low 40s. Then, believe it or not, the stock dropped to $30 per share by September 30. If you had bought it around $44, you would have lost over 30% of your money in two weeks.
Then, for a second example, I'll turn to TVIX, the double VIX volatility ETF. By the end of September, it looked like the whole world was heading into a recession. The respected ECRI even predicted a recession for the U.S. for certain around this time. TVIX jumped up to $100 per share on the first trading day of October. What if you had bought $10,000 worth when TVIX was selling for $100? The stock was selling for $75 per share just three days later. You would have lost $2,500 in less than a week on a trade that seemed like a sure thing at the end of September.
My advice is to limit trades to $2,000 unless you have money to burn. If you make 30%, that is $600, and you should take your profit while you have it. If you lose 30%, it is only $600 rather than thousands of dollars. Even the best traders may only be right 2/3 of the time. If you make 48 trades per year at a 66.7% win rate with $600 gained or lost on each trade, you will be able to keep the $600 on 16 of those trades. The other 32 trades will cancel each other out. $600 times the net 16 trades adds up to $9,600 per year that you could make with just $2,000 of investment money that you keep cycling throughout the year.
No comments:
Post a Comment