Thursday, September 8, 2011

My Trading Strategy

As much as I like to advocate value investing, I'm not as good on advocating holding a stock forever. My portfolio size, currently slightly over 100k, is not large enough to prevent me from jumping in and out of stocks. I believe when my portfolio becomes significantly larger, I will not be able to do as many trades due to slippage and volume depth. Coming from a poker background, it's my nature to try to maximize my profits in places where it's easy. Here are the rules that I trade by. These rules make sure that if the market tanks for some reason, you don't have to do panic sales.

  • Only invest in good companies. 
    • That means low PE ratio and High Return on Equity
    • The 10K's are free of fraud or sketchy accounting practices
    • The company has some kind of competitive advantage
  • Never try to time the market. 
    • I don't sell my stocks simply because I think I can buy it back cheaper. 
    • I don't buy stocks just because I think the market will go up. 
    • You'll hurt yourself in the long run.
    • Buy a stock as if you're willing to own it at the price you paid, forever.
  • Have good reasons for selling a position. My reasons include
    • A better opportunity arises and I need money
    • I'm using margin and I want to unwind
    • The company tries to change its business model to include something that they don't know if they will be profitable doing
    • The company's financials begin to deteriorate for reasons other than bad luck
  • Don't over pay for a company. 
    • If you can't buy it at a good price, look for something else.
    • Time always give us new opportunities
Those were guidelines in for kind of stocks I'm wiling to trade and the prices that I'm willing to enter. If you look at my trading history, you will notice that I trade a lot of options. My strategy is to decide a price at which I'm willing to buy the stock at, and then short sell puts with strikes at that price. When I do this with options that expire soon, it's almost as if I'm getting paid to place limit orders.

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