Hobofinance

The single greatest advantage the small investor (me and you) has over the large investor (hedge fund) is time. The large investor has more knowledge and more capital, but they need to make consistent gains, and therefore they need to keep busy buying and selling, hedging and covering. Over activity is what causes most mistakes. Not all trades should be taken, and not all that are taken should be kept until the end. This urgency to make a profit makes it difficult to step back and wait for the best trades. Big traders have a lot of losses, but they succeed in the long run for two reasons; they have a lot of capital which is managed well and cushions their accounts, and they cut their losses quickly, taking relatively small ones rather than large ones. This allows them to recover and look for the next opportunity to make a killing. For a small trader even a small loss can be fatal to one’s account. That is not to say that your winning strategy should not assume losses. It must, because losses are unavoidable. But we small traders have the advantage of only taking the best trades, of waiting, and of not trading.

This may seem paradoxical, the art of trading without trading, Bruce Lee style. Patience will greatly reduce your mistakes, and therefore your losses. This approach, while much more simple technically, is much more difficult to practice. Once you taste a bit of profit, you’ll want to jump back in with the confidence to break the market, to suck every last penny from it. That’s when it stings you the most. It’s only after a severe loss that you’ll make the best trading decisions. Losses make us aware of how vulnerable we are, how uncertain this game is. It is after a loss that you’ll check the charts thoroughly, read the news thoroughly, criticize what you read, doubt, and plan how to minimize your risk on the next trade. It is after a loss that you are strongest. It is after a real win that you’re most vulnerable, and ought to force yourself away from the market for a while. Jesse Livermore, the greatest speculator of all time would rest for weeks if not months after a trading campaign. He’d fish, travel, go to resorts, and basically live the hobo lifestyle (with his copious profits) without the hobo financial frustration until the market unveiled the next major opportunity to him again. He’d return when the opportunity was screaming him in the face, not when he felt a compulsion to make more money.