Wednesday, August 1, 2012

Position Sizing - The Key to Stock store Success

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It sounds unbelievable, but trading success has slight to do with choosing the right venture or even having a great system. Instead, it has everything to do with "how much" you place at risk on any given trade. venture professionals commonly call this "asset allocation" or "money management." However, they commonly fail to understand that the key aspect that drives longevity and success in the store is "how much" to invest in any position.

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Others work so hard to get themselves a good system, but then don't see that position sizing is the key element to getting what they indeed want. If you are fortunate enough to have a great trading system, it is much easier to meet your theory objectives straight through position sizing, but even with an median theory you have every theorize to expect that you can meet your objectives and profit, if you understand how to position size properly. That's how important this key topic is.

One of the world's most important trading coaches and psychologists has observed that research has shown that there is no correlation in the middle of the confidence citizen have in a hereafter trade and the likelihood of it being a success. This is especially true for traders with no proven system. In fact, there is probably a slight negative correlation in the middle of confidence level and the likelihood of success. In other words, the more definite you are, the more likely it is that the trade might go poorly. What I have seen over the years is that citizen are just not good at predicting success. This key comprehension is confirmed by a lifetime of research conducted by Nobel Prize winners Kahneman and Tversky, among others.

Do you indeed need to understand how markets work? No, you don't.

All you need to understand is how the idea that you are trading works. For example, if you are a trend follower, you just need to understand that the markets will occasionally move in very large trends. If you can catch the big moves, you'll make a lot of money. If you have a theory that does that, then that's all that you need to understand about the markets.

If you are a value investor, then all you need to understand is why something is undervalued and be definite in your quality to determine that. The other two things you need to understand are (1) when your investments are no longer undervalued, meaning it's probably time to sell, and (2) when you might be wrong about your estimate so you can safely abort and keep your capital. You don't need to understand the store at all. Warren Buffett doesn't-he thinks the markets are irrational.

I highly propose the work of Dr Van Tharp at the International build of Trading Mastery to look more deeply into this subject.

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