TAM's Pedagogics: April 1st, 2011

The first quarter of 2011 ended just like it began for equities, with a bang.  The middle however, was quite the “Drama-Queen,” and truth be known, somewhat puzzling technically. In all reality, it’s rare to see such a powerful short-term bounce after such a pronounced technical break. Nonetheless, our objective is to let the market tell us what it’s going to do, not the inverse. As investors we must remember two things… First, there is no room for pride in investing. Second, nothing is foolproof and works 100% of the time. If that was the truth, someone would have already built an algorithm to calculate it. An investor’s consistent methodology should be built of one single truth – limit losses and let winners run. 
 

Here is what I tell my traders… “It is possible to have a 42% win ratio and be extremely successful as long as you limit your loss (on the stops) to 1/3^rd of your successes gains. And… if you can’t win more than 42% of the time, you shouldn’t be doing this. Therefore, the rest is nothing more than the elimination of emotion and setting appropriate risk/reward ratios!”
 

Do the math… you’ll be surprised. 
 

As you know I’ve been flipping back and forth between market neutral and short since the wedge break and to be completely honestly, I’ve gone nowhere in the last two weeks. This, in my humble mind, remains to be a positive. Here’s why, a true investor should methodically swing the bat based on probabilities. If so, they’ll come out smelling like a rose; but they also need to know how to switch-hit. If no methodical implementation is applied, they’re stuck on the bench. Whichever way, you’ll eventually get your arse kicked!

This is not a recommendation but rather, a look into my perspective.
 

Good Luck and Keep your wits about you.
 

KAT