The Risk Assessment Exercise
I haven’t felt super inspired to write lately. Maybe it’s that mountain bike racing has started and my time is limited, or maybe it’s because trading has been on autopilot and there hasn’t been much to do, thus I haven’t been researching any new topics.
Today is different. This morning (more like yesterday evening) I felt compelled to write as I sense the markets are about to change.
How can you say you trading is on autopilot?
What I mean when I say trading has been on autopilot, I mean that the uptrend that we’ve been in has been rather uneventful. Day trading has presented fewer opportunities as volatility remains low and consisted mostly of identifying entries at bigger 15-min levels, or taking stabs at select micro setups.
When great fortunes are made and lost
For swing trading, every slight pullback has yielded opportunities to take profits, add to positions, or jump into new ones. As for the long term stuff well, I feel sorry for those uninformed who dumped their portfolios at the recession lows still waiting to get back in.
It’s said that the greatest fortunes are made during bear markets. This is absolutely true; maybe not so much in the downswing, but on the upswing following the recession or major dip.
The traders (and investors) who’ve been in the game for years have gone through the cycles again and again. They know the characteristics of different type of markets.
Once I’d been through the Bull Run in 05, 06, 07, the bear market of 08 & 09, and sideways markets inbetween I began to understand their characteristics. Knowing how you are going to adapt to changing market conditions is vital it you want to succeed in the long run.
The right time to act
In keeping with the 3 level approach (investing, swing trading and day trading) most of us here know that when everyone is in panic mode, jumping ship and selling all their “long term” positions that’s when you should be adding to YOUR long term positions.
These major trend changes always start with cyclical rotations. The stocks that were strong carrying the uptrend begin to roll over and sell off.
As we sit patiently riding this trend there is not a whole lot to do. It’s when market conditions change that action is required.
Risk Assessment Exercise
Now is a good time to go through and do a quick risk assessment. Review your entire portfolio from top to bottom. Here are a few questions you might ask yourself:
How much exposure do you have?
(Which markets, industry groups, and commodities do you hold positions in?)
What is your portfolio’s delta?
(Net long/short positions)
How much unrealized gains do you have?
(What positions do you have open and haven’t taken profits on?)
What positions have stops at break even or greater?
What positions still have their stops at the max loss?
What is your total risk?
(Sum of your entry risk and unrealized gains)
Doing an assessment like this is crucial at market turning points. You don’t want to get caught giving back heaps of profits, or worse.
The markets are in the process of changing. It’s time to take action.