Investment Lessons from an Expecting Father

It's been a long time since I've updated this site. I have found myself so busy that I regret to say that my posts have fallen to the wayside. In an attempt to provide helpful information to investors I will continue to post; however, on a limited basis. Nonetheless, I believe that the information I provide will last the test of time and will be a valuable resource for those who want to manage their investments better.

On another note, I am happy to say that Diane and I are expecting our first child. We are expecting in May of 2010. We just had our 18 week ultrasound and I am happy to say that our little baby boy is healthy. It's been such a miracle because we were told we wouldn't be able to have children and yet we didn't need the help of modern medicine to do so.

There are many lessons that I have learned from investing, but there are 4 that stand out to me. Matching your personality (strengths and weaknesses) against a particular trading approach is very important. Once you apply and understand this, these lessons will come in handy.

1. Keep your system simple stupid. I have created many programs in my day and I have found that the simple systems hold up better over time than the more complex ones.

2. Execute your system consistently... even when your system is losing money in the market. If your system has positive expectations (positive back-tested results), you will only have positive results if you follow it. I often see investors take a 10% loss (when his/her system indicates to hold the position) just to see their exited position make 20%.

3. Control your risk so you can continue to trade or your account may not be around long enough to benefit from the positive expectation of your system.

4. Find a trading strategy that produces positive returns over the long run.

Happy holidays and happy investing.

How To Exit With Profits

Okay, you've placed a position in the market and you're making money. Alright, when do you decide to take your profits? Here's an example of a simple strategy to help you decide when you should exit your position.

To illustrate, if you're 'long' and the market hits a 21-day low, you exit. If you're 'short' and the market makes a new 21-day high, you exit. This stop is recalculated each day and it is always moved in your favor so as to reduce risk or increase your profits. This exit strategy produces above-average profits when traded with sufficient money.

Be aware that this exit strategy can far and away make you more money than the buy-and-hold approach. Drawdowns can be significant using this approach; however, position sizing and diversity can significantly reduce drawdowns.

Forget About Buying and Holding

The strategy of buying stock when the price crossed above the 1-year average and selling it when it crossed below that average outperformed a buy-and-hold strategy by a large margin.

An Excellent Stock Market Entry Point

I want to emphasize that this entry point COULD make you rich. The reason it could make you rich is because it's a great entry point system; however, making money in the stock market is much more than 'entry points'. Position sizing and money management are larger aspects to making money in the market. What does an entry point not tell us?

• How do you protect your capital when the market moves against you?
  
• How much do you buy or sell when you get a signal, etc. etc.

You see, real money is made through intelligent exits - which allows a trader to cut losses short and let profits run. In the future I will discuss some exit strategies that you can adopt. However, all good traders have realized that money is made by developing their own ideas and following a method that is designed to fit them.

Donchian was one of the first people to write about a system using moving averages. He used both the 5-day and 20-day moving averages. When the 5-day average crossed above the 20-day average, you went long. When the 5-day average went down and crossed below the 20-day average, you reversed and went short.

This type of system works great in pure trending environments; however, markets tend to trend about 15% of the time. As a result, during consolidation periods this system gets whipsawed continually.

To overcome this problem, R.C. Allen popularized a method in the early 70s using the 4-, 9-, and 18-day moving averages. When the 4-day and 9-day averages both crossed the 18-day average, you would enter the market - long if they are moving up and short if they are moving down. When the 4-day signal crosses back across the 9, you get an exit signal. However, you don't get a new entry signal until both the 4 and the 9 are on the same side of the 18-day average.