Calling for a market bottom is the new rage. But, truth be told, what feels cool is often a very dangerous thing to do (especially with your money). And that goes for calling market tops as well. Â It’s a mentality that can consume you and affect your day to day decision making, often pulling you towards an “all-in” strategy.
As active investors, our capital is king. And, in the words of John Maynard Keynes:  the market can remain irrational longer than you can remain solvent.
This understanding carries over to my trading approach and is a big reason why my trading plans include buying or selling in legs (i.e. increments) and always include disciplined stop levels.
What many young traders fail to realize is that you don’t need a “full” position to make money.
This is even more important when we consider our current market environment. When markets are heading lower, we have to fight our fears of missing out on the market bottom. And, if you are not focused on your plan, that fear of missing out can consume you during every counter rally and “up” day.
As I often say, a measured, nimble approach is wise during volatile markets. Whether an active investor with a long-side investing strategy or a trader trading on both sides, patience is key.  Here are a couple of examples.
Example 1:  A longer-term investor buying in increments on big down days, staying patient and setting up a buying plan at certain levels (including lower levels that haven’t been seen yet). Even if you don’t get a “full” position over time, it’s nice to have decisions to make on when to book gains rather than when to take losses. It’s also nice to have capital (i.e. powder) to deploy at lower levels (i.e. dollar cost average).
Note that if you get too big of a position too fast, you absolutely need stop levels to help raise capital on the possibility of another leg lower. My opinion is that it’s best to never get to that point.
Example 2:  A short-term trader may really like said STOCK XYZ at $24.75. Why not buy a 1/3 of your envisioned position size at that level and create another buy level below it? If the stock turns higher, you still make money (even with a smaller size). If it goes lower, you have capital to allocate.
Smaller position sizes also help you to see the market more clearly and make rational decisions… even in an irrational market.
It’s important to have an idea of what’s happening in the markets and build a trading (or investing) plan around it. Just don’t forget that your capital is king. Always.
Thanks for reading and trade safe.
Twitter:Â @andrewnyquist
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
