Saturday, May 5, 2012

Manage Risk or Ride the Winning Hand?

Market showed very strong selling pressure on Friday - and has made me alert to potential further weakness next week.  I set up a few positions on Wednesday which got stopped out within the first 48 hours of the position being initiated.  I clearly thought the 1400 level would be held or prices to remain near that level by week's end.  The consolidation period continues for now.

So what's the line in the sand over the coming week? 1350 is definitely a level where you'd have to reconsider your momentum longs if it's broken, we're definitely in trouble.  AAPL got hit very hard, unable to take hold of it's 600 level. 

Another reflective thought is whether or not to be managing risk in the upswing - or adding to risk when you feel that you've made a good % and you want to really try to hit the ball out of the park with your winnings.

The two philosophies remind me of two market players with two differing styles - 
1/ the Keith Mcullogh style of risk management - adding on ups, selling on downs, and overall trying to have a balanced long/short portfolio across asset classes.
2/ the George Soros style - have your equity base, and leverage returns using forex and other asset classes; but when you're winning, and you're up a large % in the 1st quarter - go for an even greater return when everyone else is scaling back risk.

Given my history in playing poker - the best sessions often come when you continue to play longer sessions when you're catching hands AND you've got a good read on your opponents, and they are also playing tired or behind.  So the market analogy of risk management is to have the monster winning nights that actually make playing the game worthwhile as opposed to just grinding out sessions in a low volatility manner.  

Ok, so let's assume we want to be playing the 2/ Soros style or risk management - how do we add to the risk - do we add to our winners, or do we add new positions in different assets classes - and do we add positions that are trending or positions that are in their mid cycle retracement? This is the key question that I am pondering this weekend.