Increase Your Profits With This Powerful Trading Tactic
The strategy is no sign of failure, it's a way to trim risks and raise profits.
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Investing is the art of managing risk. The best returns are earned when you increase your risk exposure when conditions are favorable and reduce risk when things don't look so hot. It sounds simple, but it is not an easy job, and most investors fail miserably at making these types of adjustments. Ramping up your holdings in a great stock when the odds are positive and exiting when they are poor is how you become rich and stay that way.
The most powerful tactic you can employ in managing your risk exposure is the sell-and-rebuy strategy. You sell down a position when there is risk and increase and buy it back when there is less risk. That may mean you rebuy at a lower price or when market conditions or technical patterns are better. If you end up having to rebuy at a higher price, that is irrelevant as long as you have improved your risk profile.
For a number of psychological reasons, most investors are averse to employing this tactic aggressively. They much prefer to hold their positions through volatile periods and hope things will eventually work out.
Most investors don't take action to adjust risk levels, because they fear they will miss out if they reduce exposure to a favorite stock. The thinking is that, "although short-term technical conditions look poor, if I reduce this position, it is sure to take off, and I'll be left standing on the sidelines."
While that thinking is understandable, it is also undisciplined and lazy. Producing superior returns requires some extra time and effort. The effort that is most needed is to constantly evaluate your holdings and be ready to take action and adjust them as conditions shift.
There is a natural reluctance to sell a stock and buy it again, because it creates the feeling of admitting a mistake and being indecisive. It is viewed as a tacit admission of failure rather than an aggressive tactic that astute traders employ to increase returns.
The key to the sell-and-rebuy is to not think of it in terms of profit and loss. It is just a way to position as risk levels move up and down. If overall market conditions start to deteriorate, then evaluate your holdings and reduce something that is thinner and has greater potential for a substantial pullback in a poor market. Try to avoid a big drawdown when the risk increases.
The goal is to add the stock back after a selloff when market conditions improve and chart patterns are more favorable. If you have to book a loss to reduce risk, it should have no impact on whether it is the right move or not. The only thing that should matter is being in an improved position with less risk.
The theory of adjusting position size as risk levels fluctuate isn't terribly complex. It all comes back to the George Soros comment that, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
The way you put that advice to work is by adjusting position sizes as risk levels change. And the way you adjust risk exposure is by using the sell-and-rebuy tactic.
Wrap your mind around this way of thinking and put it to work.
At the time of publication, DePorre had no position in any security mentioned.
