Investment/Trading Nirvana

Copyright (c) 2009 John Howe

Perspective is gained from experience. Experience takes time, it takes " the doing". If you've been an investor or a trader, chances are just about 100% that you've experienced the expenditure of precious time, focused your energies, done your research and moved forward confidently into a losing trade. #?*****!!!!

Back to the drawing table. You are not alone. With all of the available tools, we should all be invincible. The market works by feeding our delusion just before it takes our money.

After a while, watching account balances climb and fall, the light goes off. Your research is good. How good is good? You ask, 'How much time will it take for me to get really good at this investment/trading thing. Calmly, you realize that there is only so much time and maybe there is someone who has already gone through all of this who has really found a workable answer, a workable definition for "successful trader/investor".

What would you ask for if you could find what you considered the perfect investment approach? Let me share a few thoughts here. How about a signal that goes off on average every three to four months? This signal will tell you one thing; be long or be short. That's it. Be long or be short with 80 to 85% confidence.

Think about this for a minute. Suppose this signal had nothing to do with price. This signal was based on what the large parts of the market were doing - buying or selling. If you could find this signal, what a base this would make for a trading plan. Let's say the signal says it's time to go long. A portion of your account is invested. The market moves higher and then gets hit and values decline, the weak money sells out, prices are down and you... buy.

Part of your account was long and now another piece is added. Two days later the market runs hard to the upside. The newest long position is sold. This piece was designed to take advantage of short term market fluctuations and signals were communicated to take advantage of these short term moves. Meanwhile, the positional piece, the first long position stays in place. The average position time for these positional trade pieces is the three to four months mentioned earlier depending upon how the market is running. Of course at the end of the position trade you will exit and either go to cash or go to the short side of the market. Conveniently, it can be done with ETFs.

Nirvana says keep it simple, take away the stress and take away the worry. Participate as actively as you want depending on how you're feeling and how much time you want to devote to the exercise.

How are these people found? I hate to say it... research. More than research though, once a capable person has been found then you must make sure that what you are seeing is actually the truth. You have to follow the trades, on paper at first, and then as confidence builds, commit some capital.

A sobering word, do not think there is a riskless investment. There is not. Do not believe the back testing. Back testing is a clue that there might be something worth exploring. If you feel you have a signal, a person, a program, go with it on paper. Learn it. Feel what it would be like to participate in these trades and make sure you can stand the parameters.

Parameters are the risk(s) you can stand (highest high to lowest low) before you have to fold your hand. If you can't stand the pain a signal generates, don't use it. It won't work for you. Understand the average risk (average draw downs) a signal provides and compare the risk to the reward you see being generated. Compare the risk and reward and ask yourself, "Am I being paid to take the risks to which I am being (or would be) exposed?" If it does not make sense, DON'T DO IT!

This sounds like a lot of work. It is. It can be. In over thirty six years, I have found a handful of really great investor/traders. One runs a long term investment process, the other a short term process. Is all the work worth it? Oh, yes...