Sunday, September 09, 2012

...And some you lose

Following on from my previous post, the strong move up caused me to be stopped out of one of my short positions, which had been going nicely in my favour.

As I've mentioned on many posts, I always try to have some positions open in the opposite direction to the general market trend. This is partly as a hedge, and partly because if a stock gives an entry signal in the opposite direction, it can highlight a high level of relative strength or weakness in that particular stock.

Again, I was more than happy to accept and embrace the notion that, if the markets took off then it was likely that my short positions would get hit. However, there was the possibility that the major news announcements last week could have had the opposite effect on the markets. The bias in my portfolio has been to the long side as there has been uptrend in place in the indices for several weeks now, however I wanted some short positions as insurance, and if I lost on those trades, then so be it.

Remember that you need to accept that on a sample size of one or even ten trades, it is a coin toss as to whether you will win or lose on those positions, even if you try and skew the odds in your favour by using a proven system. There are always unknown or unforeseen factors that can come into play, and this is why it is important to use proper risk control.

However, by using that same system on a sample size of 100, or 1,000 or more trades, you know that you will come out ahead. Therefore those losing trades should be treated as a cost of doing business.

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