Your Duty in the Market

Contrary to popular thought, your first duty as a trader/investor is not to make money…

Your first duty is to protect your capital.

Most would-be-traders don’t understand the necessity of capital preservation.  Consider some simple numbers. 

If you lose 10% of your capital, you need to earn 11% of the remaining capital to break even. 

If you lose 20% of your capital, you must earn 25% to get back to zero.  This is possible, but difficult. 

But if you lose 50% of your capital, you must earn a 100% return to get back to your original capital.  In this case, the odds are very strongly against you.

If you protect your capital, you gain time enough to develop the skills and tools necessary to become a successful trader.  If you risk too much, you’ll probably blow out your account before you have a chance to achieve.

Your second duty is to identify and balance risk.

In the financial markets, it is necessary to risk your capital in order to earn a return.  This is the cost of doing business as a trader/investor.

To identify risk, one must learn to read a chart. 

To balance risk, one must consider identified risk, price targets and total capital.  We must risk enough to earn a minimum return.  Otherwise, it’s not worth the time and effort. 

However, from a mathematical perspective, risking too much is the fastest way to ruin.

Total risk in professional portfolios rarely exceeds 10% of total capital.  Additionally, a popular thumbrule is to risk only 1% of your total capital in each transaction.

In general, there is less risk in trending markets.  Consolidations, on the other hand, can be very risky and should be avoided.

Your third duty is to maximize return on investment.

Let's consider the formula for return on investment

RETURN ON INVESTMENT (ROI) = (CHANGE IN PRICE) / (TIME)

To achieve the best return on investment, change in price must be positive and large.  Otherwise, the return will be negative or small.  Also, since time is in the denominator, shorter periods increase ROI while longer periods reduce it. 

To generate maximum return, we must seek technical conditions which suggest strong price changes in short periods.

These conditions predominantly exist in trending markets.

Trends create 70% of the price movement, but occur only 30% of the time.  It takes a great deal of patience and discipline to trade only the trends. 

On the other hand, ROI is seriously degraded in consolidations because as price wastes a great amount of time going nowhere.

Unfortunately, most novices believe that they must always be in the market to win. 

Consequently, they spend too much time overtrading while floundering in the chaos of the market noise.  It is easy to understand why most lose money.

At PhiCube, we have exceptional tools to identify trends, consolidations, risk, and suggested return.  This allows us to properly balance risk with return, which increases our chances of surviving and profiting in the long run.

Join the PhiCube community now.  Come see how the simple, elegant power of PhiCube can help you survive and prosper.