How to use the worst case scenario to size your position

One of the biggest mistakes a novice trader makes is feeling the need to throw their money into the market simply because they have it. The reality is that there is no shame in holding cash until you see a real opportunity. It’s a matter of being patient and waiting for the right time to strike. A pride of lions could spend hours, if not days, stalking prey and setting up a strike that will last only seconds. A wise trader will exercise the same patience by stalking an opportunity in the market and striking when the time is right.

Some of the best performing hedge funds aim for a 25% annual rate of return, which is a little more than 2% a month. Most stocks, and the market itself in recent days, fluctuate by 1% to 2% on a daily, or even hourly basis. If you focus on just the trading aspect, one could say that a fund manager can do a month’s worth of work within a day or even hours. However, I’ve only highlighted the trading aspect, and it does not include the countless hours spent on research and other areas of the business.

The most important thing people need to understand is that opportunities are out there and plentiful. Having money to invest doesn’t mean you should start throwing your money into stocks that got upgraded by a big institution. A person should have a list of criteria they are looking for in a stock, and look around until they find something that meets a majority of those criteria. This might take some time, but there are plenty of stocks out there, which means there are plenty of opportunities as well.

My personal criteria includes great technical charts, good fundamental background, and good sectors and sub-sectors. Once I find the stocks that come close to meeting these criteria I wait for the optimal time to buy, usually on a pull back, or whenever the technical upside looks greater than the down.

Like the lion that patiently stalks its prey for hours or even days before committing to a strike that lasts only seconds, this is a time-consuming process that requires patience. Months could go by before you see something you like, but trust me, it will come. And when it does, it will pay off big.

Tan Liu