Hope is not a viable strategy

Markets grinded higher again making yet another YTD high. So much for Doug Kass's high of the year call...but he said that when the SPX was at about 1035 so I'll cut him some slack here....if the market ends up printing the high of the year today, I'll give Kass his kudos.

The market's relentless march higher has made even the bulls surprised. But, I must warn, when you see the market make relentless marginal gains for a long time like this, a sharp (but usually short) correction lurks around the corner. Over the past 6 months, when we've seen such corrections occur they tend to happen in the morning (often via a gap down) with most of the damage done within the first 30-40 minutes. So, the only way to capture the downside is to try and pick tops and/or holding bearish positions overnight which for the most part has been a disastrous strategy. If you are going to pick a top, you gotta look for the gap up opens....such opens indicate emotional type buying which is prone to reversal.

I've tracked a few retail traders out there who have stubbornly shorted the market via bear etfs and kept adding to their positions as the market went up to the point where they were "all in". I've even posted the stories of some of these clowns. As the market moved further still against them creating massive paper losses, the only thing they could do was hope that the market turned down...eventually they capitulate for massive crippling losses. Please, please don't ever put yourself in a situation like this whereby you are hoping that things turn around to rescue you from massive losses.

HOPE IS NOT A VIABLE INVESTMENT STRATEGY. Actually, the only time you should hope is when you have a winning position...you should sit tight and hope that you make even more money. There is of course a fine line between letting winners ride like this and being a greedy pig (which end up getting slaughtered). But as the saying goes, manage your losers...the winners take care of themselves.

As an example, today I got chased out of my puts in POT. I was making a bit of money on them for a couple days but then today POT had a huge rally and I got stopped out (at about breakeven). It sucks to see gains evaporate but had I not used a stop those gains would have turned to losses equal to about the same amount. Had I hoped that POT would tank so that I'd be making money again I'd be loser. I was wrong but because I didn't stay wrong for long I didn't get hurt. In this case, I didn't take a loss but I would have if I had to.

When you are wrong don't hope that things will get better so that you will be right. Get the fuck out. When you are right, hope that you will continue to be right (but don't get too greedy). That's the beauty of this game. You can be wrong more times than right and still make money. You may have heard the above before but it's easier said than done to follow this line of thinking because you need to balance patience with discipline and add in a bit of finesse. For example, it's good to use stops to limit losses but if you set them too tight you can get stopped out due to random fluctuations only to see things reverse the other way leaving you on the sidelines.
If you are going to use stops, you have to set them at a point where you would CLEARLY be wrong (which will depend on the time horizon of your trade). You can still get whipsawed but that's OK...its part of the game..... Stops are there to make sure you survive to live another day. You also need to know when to move a stop and that's where the finesse comes in because it depends on the circumstances.

I don't always use stops. For instance, sometimes I will enter "all or nothing" type trades whereby I'm aiming to hit a home run i.e. a 100% + return. In this case my stop is at 0. I'm willing to lose it all but because I will only commit say 4-7% of my capital to such a trade, which in that in a sense, is like a stop.

Bottom line: Never expose yourself whereby if you are wrong you are wiped out or severely crippled. Live to see another day. This is the golden rule of trading. It's ok to be wrong...just try not to let it deflate you...this can be tough I know...but what I do is remind myself once in a while (especially when things are going well) that there's going to be times when I am ice cold...it's inevitable because this is a game of probabilities and just like in poker, even when you make the right move you can still lose due to bad luck (you can also lose due to due stupidity which I also accept is something I will do from time to time).