Podcast: Make trading asymmetrical

In JSE Direct, Latest by Simon Brown

Make trading asymmetrical

Make trading asymmetrical

Simon Shares

Make trading asymmetrical

I have spoken often before about how one of the huge benefits of investing is that a diversified portfolio is asymmetrical. You may have held some horrid share and lost 100% of its value. But 100% is the most you can lose and your winners can exceed 100%. In fact a true long-term portfolio will most definitely have many +100% winners so if you do get caught in a 100% loser – you’re fine. The important point is that you need to be diverse and have more than one share and ideally a core of ETFs surrounded by a selection of 10-12 quality shares.

Now as a trader of leveraged products such as FX, CFDs or futures your potential loss in any trade can exceed 100%. The warning that loses can exceed your deposits is absolutely true and as such trading is symmetrical. Your winners can be offset by losers and you can end up going nowhere, or truthfully you end up losing money.

But a trading portfolio can be asymmetrical, if we have a strict stop loss we adhere to every time. EVERY time. Couple that with the 2% risk rule (never lose more than 2% of your capital in any one trade) and bingo – you have asymmetry in your trading portfolio as well.

This is the whole point of trading. We’ll have a random dispersement of small losers and winners. A lot of break even trades with the occasional large winner but also the occasional large loser. Without the silent killers of; spread, slippage and costs, that portfolio would go sideways. All we have to do is ensure we NEVER have a large loser and boom, we’re making money.

This points to the tree critical aspects of trading. Position size (2% rule), stop loss and capital.

Capital is important because if you have only a few thousand rands to trade with you cannot do proper position size hence ensuring you’ll go broke.

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