Fear of missing “the big one”

The point here is it is NOT the magnitude of the move that is important, but the opportunity cost of missing it.

The opportunity cost is a function of:

1 ) the move size;
2 ) your position size for that move;

Your position size should be determined by your expected return vs risk.

Seeing as "the big one" is by definition unexpected, your position size will most probably be very small. Consequently your opportunity loss will be small. In other words, "the big one" is an illusion.

Looking at this another way, smaller moves will by definition be more likely, so levergae is more sensible. It will thus be possible to construct many situations with equal opportunity cost from leverage and noramal market moves. Your only obstacle to "big ones" every day is being right.

When you realise the market presents, with varrying degrees of position size and leverage, opportunities to make or lose fortunes everyday, the concept of "the big one" disappears.

QUOTE: "Your position size should be determined by your expected return vs risk."

How does that work?

Surely your position size is determined by the amount of trading capital you have.

A trader should be aiming to build as big a position as possible in the moves that turn out to be big moves.

By only having a tiny position size on a move that turns out to be a huge move, a trader is not maximising on his or her biggest winners.


Thanks

Damian

And you ask me how what I said works!

For anyone who is interested, there is a correlation between risk and return. Boring dividend paying stocks are never going to reach for the stars, but they are also unlikely to go to zero. Multibaggers however are totally different. They come from industries that have either been out of fashion or are new and experimental. These stocks either make it big or go bust. Given this, it is ridiculous to put all your eggs into such vehicles. Yes it would be nice to invest heavily in such ventures, but would it be sensible? hell no!

Now your turn: how do you invest (present) heavily in something that turns out (future) to be a big winner? It might sound attractive, but wanting and achieving are totally different.

I have made a lot of successful trades in some of the so-called "boring dividend-paying stocks" - it all depends on how you trade them.

The way you trade (present) in something that turns out (future) to be a big winner is through pyramiding - that's how you make sure you have maximum involvement in your biggest winners.


Thanks

Damian

You are confusing desire with methodology.


No need to thank me. Glad to be of help.

Hi Sledge,

Sorry mate - you've lost me.

Thought I'd made some valid points.


Thanks

Damian

You've made valid points as long as the status quo continues, as with any momentum strategy.

Well obviously..............the whole idea with pyramiding is that you add to a winning position - it's not valid to add to a losing position.

Anyway, I think we've totally lost the original point of this thread now.


Damian