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Rookie Blog: The Check-Up!

October 29, 2020

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This week’s blog is going to focus on protecting our portfolios. If you have been watching the markets in the last couple of weeks there have been two market conditions that have been weighing heavily on the minds of traders. We have been mired in consolidation that for directional traders feels like death by a thousand cuts and we have also had a drift lower which has been tough for the bullish position traders. These two groups of traders cover a lot of the traders in the markets as well as the investment community at large. The question for this week is what do all these folks have in common and what should they be doing to prevent this painful scenario from playing out?

It doesn’t matter what your take is on the markets or how you view your trading style in relation to the markets there are certain things that we all need to do to save our portfolios from disaster. You can be a theta trader or a delta hound or even a vega ninja and we all have to do the same things in regards to the market to prosper. These things that we have to do may seem to be basic and self-evident but the reality is that most people overlook these simple processes that can save from larger drawdowns.

Now that I have brought the drawdown word out I can imagine that you understand that all traders and all portfolios go through drawdowns. This is the common ground for all traders and all trading systems. I have been trading well over a decade and I have spent years with traders that have many times more experience than I have and I haven’t seen a system or a trader that doesn’t face drawdowns in their portfolios. This is part of the game of trading and it is not something you can get away from. Therefore if you can’t get away from it then the smart traders learn to embrace the drawdown knowing that after every drawdown we are set up for the next push higher.

The question you should be asking yourself is, “how do I trim the duration and magnitude of the drawdown so that I can get back to the next leg up?” This is where we have to rely on our processes to keep us on the straight and narrow.

One of the most important processes of any trader is the daily routine and more importantly the daily review. This is the process where you take a look at your portfolio and manage risks. This can mean closing positions that are in trouble or causing undue damage to the bottom line. It can also mean moving stop losses into strategic positions to lock in profits or reduce exposure. This can mean cutting position sizes when trouble may be afoot.

A typical daily routine is looking at the market from a top down approach mean that we look at the overall market first and see what it is doing and determine what we think is happening and going to happen. Then drilling down to each sector to find strength and weakness as not all sectors are going to be down at the same time all the time. We can then drill down even further into industries and then finally into individual stocks. Our routine should have a review component to it from a portfolio perspective and this can be done in any number of ways. The important thing about the review is that you mate your posture from the overall market with the look of your overall portfolio. This may seem very basic but it can super important as during this review we have the opportunity to spot issues before they become problems.

One final thought on this is that we must give volatilty is fair attention. You may have a daily routine that you check your portfolio once a day and fix whatever needs attending to, however in times of heightened volatilty it might be wise to check your porfolio more than once. I say this because the markets trade overnight and this can present issues that are not always self evident and in times of heightened volatilty things can change quickly and it is always better to be aware then caught of guard.

So, in closing, make sure you give your portfolio the check up it needs and deserves because at the end of the day trading is like growing a garden, the more attention you give to the garden the higher the yield will be from the harvet, the same is true with your trading, the more attention you give to your positions the better off your yield should be.

Happy Trading

Coach “Old Money” Holmes

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