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    Thursday, September 4, 2008

    Everybody has an edge, but here's what really matters


    I received a few emails regarding my discussion of trading edges. It's safe to say that just about every trader has several edges, which is to say they have strategies with positive expectations. Too much time is spent on this particular aspect of trading, with much less regard for proper money management. The "secret" to trading lies in controlling risk, not in continually finding a better edge. In short, without proper risk control, even a spectacular edge can bankrupt you, but give me a so-so edge, and with proper risk management, and I can still make a living. Keep this in the back of your mind at all times. Every decision in life is a trade, with a certain probability of various outcomes. If you approach trading and life in this manner, you can exploit the good times, and better understand the tough ones.

    I strive to stay unbiased in my trading. Of course I have opinions that I act on, but I remind myself of what my system says I should be doing, rather on "analysis". I am fully aware that there are always good arguments for both directions. For example, I'm long gold and agriculture commodities right now. There are very good arguments for lower prices on gold, as well as reasons it could make new highs, yet none of these has anything to do with my trade. Since these are just guesses, based on opinions, they cannot be measured with any degree of confidence, and so cannot be considered in my decisions. We all have limited resources and knowledge, and our success primarily hangs on how we exploit our imperfect edges.

    Stocks could go either way, in my opinion. Great arguments abound for both directions, so I'll most likely sit tight until the market tips it's hand. I might even miss the first big move of September, but it will only be a function of waiting for better risk/reward. If a trader is currently "heavy" in stocks, long or short, I see it as unwarranted risk, even if it works. Instead, I"ll wait for bonds and stocks to confirm each other, then make my move.

    Lately, all asset moves have been dictated by the strength of the $USD. Please understand that in my efforts to stay flexible, I acknowledge that the short term trend has changed. I am not a $USD long, but will temper my expectations (take profits, in other words) if commodities can get going for 6-10 days. In short, I feel that the market's rotation is really not providing much follow through. The best moves don't typically occur when yesterday's leaders are today's worst groups, and vice versa. One last observation, action like we've seen lately is typically the sign that much larger things are changing under the surface. As such, I am forced to consider the possibility of further $USD strength, possibly for a year or more. I haven't yet bet in this direction, but am open to the possibility.


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