A “Hopeless” Reader

In case you missed it, reader Chuck had some interesting comments a few days ago:

It’s true that there are so many conflicting opinions as to whether the markets will rise or fall. There are good cases to be made on either side. It seems to me that, up until now, the big money is betting on this bull.

I think that’s why I like trend following. You can ignore the opinions and react only to what the market is actually doing. That is, if you can stick to your strategy and not let your emotions rule you. I can’t, LOL. I sold out Thursday.

I hate a directionless market and it makes me nervous. I’ll probably buy back in on any slight correction. Maybe I’ll buy back in next week no matter what. I admit that I was in in June and sold out early July on a slight correction, only to get back in in early August. I don’t seem to have the stomach for even a small (5%) loss. Subsequently, if I get down 3-4%, I usually pull the plug.

Am I hopeless?

What Chuck is referring to is something I deal with in my advisor practice on a daily basis. It’s called a client’s risk tolerance. With new clients, I tend to start out with a more conservative stance within the framework of trend tracking and then switch to a more aggressive mode, if requested.

When you are investing in anything, you have to be sure that you’re comfortable with the approach itself along with the potential risk involved. If you’re not, you will not stick with for the long-term, which is where the rewards are.

While I don’t advocate setting stops as tightly as Chuck does, he seems more comfortable with the outcome and apparently does not mind the more frequent whip-saws resulting from his approach.

However, when dealing with tight stops and frequent whipsaws, you have to make sure that you don’t do the same on the upside, which is taking profits too quickly. You need to let your winners run until the trend ends and reverses. Your trailing stop loss will then tell you when it’s time to exit your position.

Not letting your profits run and cutting your losses too quickly is a bad combination. You may find out that, while your downside is well controlled, you’re not making enough on the upside to make up for the small losses you incurred. In other words, you’re simply treading water.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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