Sharing No. 2c

Sorry for being absent for so long. I was very caught up with my schedule for the past few weeks.

On the exit strategy, I had mentioned earlier that before we enter into a position, we should have already thought out how we will exit. Slightly more complicated here, because it involves quite a few dynamics. I apologize first in case I am not able to list them out in a systematic way.

How we will exit depend on a combination of:

(1) Whether we are in a bull or bear market,

(2) Our investment horizon – short or long-term, which will more or less determine what analysis we use (fundamental or technical), and

(3) How the market environment changes while we are in an open position.

Just to provide some perspectives, I shall give a few scenarios. For example, we are in a bull market, the targeted exit price we had set using either fundamental analysis, or technical analysis, is achieved easily. This is when we should set new exit points so as to let our profits run. The reverse is true for our losing stocks. We should be very discipline in cutting losses for stocks that go very wrong.

If we are in a bear market, we should not be greedy and should always lock in our profits whenever possible. Losing trades are also exited once our cut loss levels are hit.

On the investment horizon, long-term investors are often not bothered by the short-term market volatility. Both fundamental and technical analyses are applicable to help determine the exit points. For short-term traders, the exit strategy is more dependent on technical analysis and market events/sentiment.

The last point is especially relevant for short-term traders. If we are sure that the market is turning against us, it is better for us to exit as soon as possible in order to minimize losses or profits lost.

For clearer explanations on the entry and exit strategies, I will recommend this book: “The Little Book of Value Investing” by Christopher H. Browne".

For the trader’s psychology, I find it quite difficult for me to explain it well enough, because it is something that every trader has to experience himself/herself in order to understand the importance of having a strong mentality. It is an intrinsic value that oneself needs to acquire through experience. But reading up some books on it will help to a certain extent too. Just to share a bit on how mentally taxing it can be – imagine you try to trade a counter and end up getting stuck, then you observe a fight breaking out between the buyers and sellers with the price going nowhere, or worse still, the price starts to go against you. That’s when your emotions set in and you struggle to maintain your rationality. You do not know whether you should just cut the loss for fear that the price might recover later, or whether you should hold on the position or even average down on it. All kinds of thoughts will be running wild in your mind and stressing you up. You end up praying hard that things will turn out fine for you. For those who try to play contra without any holding power, the stress is much greater due to the time constraint involved.

If you have been trading these few days during the current market downturn, you should understand perfectly what I am trying to illustrate. That’s why the trader’s mental strength is so important. If you are interested to read up more on mastering the market psychology, I think these two books by Dr Alexander Elder will be useful: “Come into my trading room”, and “Trading for a living”.

Note: Kindly read my first post About Myself, on my disclaimer. Thank you.