The Way of the Dollar by John Percival

Author:John Percival [Percival, John]
Language: eng
Format: epub
Tags: sci_business

Market Lore

If you had to choose just one piece of market lore that has survived the ages it might be the adage “cut your losses and let your profits run”. Like all such adages, it is not a panacea for beginners. It only works once you understand it deep down, from experience. And experience can’t be taught.

This adage comprises two concepts. One is that we must have a system for distinguishing good trades from bad ones. It may be rough and ready, but concluding that trades that show you a loss are bad trades and those that show you a profit are good ones has the benefit of simplicity and common sense. The other concept is that we must get full value out of our good trades. We cannot afford to fritter them away.

There is an overwhelming weight of evidence in the handed-down wisdom of the markets that the big money successful operators have ended up taking out of the markets over time has almost all been made in trades that were held over the long haul. The long haul means different things to different people. But no matter what our time frames may be, the long haul is those trades we held through the corrections.

You only know this is true when you have done it a few times. It’s a matter of understanding what is driving the price; understanding that a move is in its early stages and why; and understanding that the time frame of those who are responsible for the correction is shorter than the duration of the move, and that your time frame is longer than theirs. You know you mustn’t lose your position.

Losing your position is the occupational hazard of active traders. Listen to old Mr Partridge, a hero of the legendary trader Jesse Livermore*, in the story told in Reminiscences of a Stock Operator. Old Partridge was being hectored by a young tyro to sell a stock they both held on the grounds it was due for a reaction. The old hand said he was much obliged, but he couldn’t possibly do that. Why on earth not? Because this was abull market… “if I sold the stock now, I’ d lose my position “ , he added, in some distress –explaining that he had gained this insight through many years of experience. “I paid a high price for it and I don’t feel like throwing away a second tuition fee… It’s a bull market you know.” And with that he strutted off, no doubt leaving the youngster none the wiser.

Old Partridge knew that if he was fortunate enough to be holding a

good stock in a bull market, he was in a good trade. He might or might not be lucky enough to call a reaction. But even if he were lucky, he would have to be lucky a second time to get back in at a good price. From bitter experience he knew that his odds were much better holding on to his position.

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