3 Trading Principles To Solve Any Investment Problem
Korbinian Koller | Nov 10, 2019 05:40AM ET
You will find the word principles being used often in our publications. This is based on the phenomenon of market speculation to be counter-intuitive.
We can solve most problems by relying on our experience and gut. It is by far the worst to do so in investing. Usually we orient ourselves measuring against peers. So who knows if the neighbor tells the truth about his riches and has not gotten them through inheritance. Which elaborate stories about market speculation success are true?
Think tanks filled with chess world champions and rockets scientists have failed to harness the elusive market. This means a strong left-brained approach isn’t the solution either.
How about modeling those who succeeded with a proven record? Well, if you followed funds who had astounding track records in the multi-decade bull run and invested at the end of the last century you also lost your money. Some of these trend-following champions went belly up. As trend followers, they had no clue of how to trade sideways or declining markets. Luckily there are principles – solutions to any problem.
h2 We need trading principles/h2Speculators need principles that guide them and provide that stability that is missing to own confidence. A vital ingredient to success in market speculation. Just like we lack the sense to measure time and need devices to measure it, we also do not have any intuitive relation to probability. Intellectual reflection simply isn’t enough to act upon such needed concepts in a proper manner. We need devices like watches to become confident in a surrounding where our senses have no bearings.
Using investment principles creates a high probability of predictability of the market, as well as a stable hit rate and solid risk/reward ratio. Above all, it allows for a calm mind to execute trades.
This approach is most needed in environments like the recent uncertain topping/continuation formations to stay emotionally neutral.
h3 Trading Principle 1: "Sector Strength Rotation”/h3Daily chart, Silver/U.S. dollar October 31, 2019
On October 31st the precious metal sector experienced, not untypical at the end of a month, strength rotation within its group of instruments. Gold in particular showed first signs of weakness. This alerted us to reduce our exposure size of capital towards the market.
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Silver, 60 min chart, 10/31/2019
This 60 minute chart shows more clearly the specific exit timing within the trading day. Three days later the last 25% of exposed capital got stopped out at break even entry levels (see quad strategy).
h3 Trading Principle 3: Weekly Long Entry/h3Silver in U.S. dollar November 6th, 2019, daily chart
Prices retraced back within the supply demand zone (= prices between the green and red horizontal lines). This warranted again for an entry. It is this cat and mouse game in struggle zones between time frames and possible continuation patterns on the one end and topping formations on the other, where the mind can play tricks. Trying to find direction of the market is simply not the solution for the speculator. It is here where a neutral stance is necessary. Subsequently market participation being solely based on high probability and low risk entry points.
By stacking these principle edges you will find yourself a step closer to be independent of the good opinion of others. It is this independence that stops the chatter in one's mind of whom to follow and what to believe in a field of constant uncertainty. It is like wearing a watch and measuring time, rather than guessing what time it might be.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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