Since I’ve had two people Direct Message me this morning with questions on how I can stay in a speculative run in stocks like the one we have been in lately, and having my calendar slow down in anticipation of the holidays, I thought that I might share some “Thoughts” on the market action recently, my completely incorrect personal predictions on the economy, and how, despite those economic predictions, I managed to be looking at a over +35% return this year with my All-Weather strategy.

The early years of my trading:

We have to travel back in time to my younger years when I would read the Wall Street Journal, all sorts of newsletter (hard copy back in those days), and look at actual published economic data. I tried to be discretionary in my early going and failed miserably. I had no idea what good trading principles, had no strategy and realized on a number of occasions that I had no idea what I was doing. Position sizing was non-existent.

Aha moment:

The aha moment came when I realized that I was a very small speck in the volume of the exchanges each day and the markets could not care less which way I was leaning. With the help of math, simple indicators and, after I bought my first personal computer, I realized I could buy or sell very quickly using stop orders while I was working my day job as a chemical engineer and not affect the market’s pricing at all.

At that point, I asked myself this profound question: “If I can measure the trend, act on it swiftly with minimal time spent towards the process, what makes me think I need to predict the macro economic environment or the general stock market?” Why should I try to compete with all these Wall Street types that have all day to try to predict the market’s direction and position their billions in the right direction.

All-Weather Trader

This year has been far better than I would have predicted:

Fast forward to 2023. We came off of a less than stellar 2022 and when I looked at how our government was racking up deficits, debt, pushing interest rates higher and getting the country involved in more military conflicts around the world, I thought, “2023 is going to be rough on the stock market.” Boy was I completely wrong on that one!

As a trader with about 50 years of experience, I’ve been through scores of bull and bear markets. Some I’ve thought were in line with my thinking of what was going on economically speaking, and some completely fooled me like 2023. But the reason I’ve been so successful is that I simply refuse to predict what prices will do going forward. If you’ve read The All-Weather Trader, you know that I run lots of strategies in lots of markets, with multiple indicators and multiple time frames. None of that requires that I predict anything. The price action finds its way into the strategies and it becomes obvious where to put my stops to get in or out of a position. Indicators went over to the buy side in the later part part of 2022 and with some hedge whipsaws along the way that hurt performance slightly, 2023 was a decent year looking back. I have held through it all and never have been tempted to “take profits”. If I would have predicted what would happen, the story might be very different.

Position sizing plays a role:

The second part of the answer on how I can stay in profitable positions when things are becoming insane is my position sizing. In my book, Successful Traders Size Their Positions - Why and How?, I outline the formulas I use to set both initial and ongoing position sizes in my portfolios and trading instruments. Using both risk and volatility as a percent of my equity smooths things out both on performance and mentality.

As any market get insanely overbought or oversold, volatility is usually increasing and many times your current price is getting pretty far away from where your logical stops might be. That means that your risk and volatility per unit as a percent of your equity may be skyrocketing, which would tend to make anyone nervous and ready to pull the plug on sizable profits.

To counter that tendency, and as I outlined in my book, I preset levels of risk and volatility as a percent of my constantly changing equity for each position. When you get wild markets, and risk and/or volatility as a percent of equity get higher than I’ve decided I want in the portfolio, I simply sell off enough of the position to get me back under my maximum tolerated levels. Many times this means selling into the strength or buying into the weakness and many of these actions tend to be locking in some profits on these wild trades. It sure makes it easier to hold on to very large profitable positions with a tolerable amount of exposure.

So, as we head into another new year, resolve to get your trading logic down to watching prices and reacting routinely to them using whatever you decide constitutes your own strategy of how you buy and sell. Clear your trading mind of predictions end execute. Maybe you’ll more easily enjoy the ride in 2024! Merry Christmas and a Happy and Prosperous New Year to everyone! Tom Basso