What a week!
Crude trades over $95 a barrel, gold hits new highs and Google breaks over $700 a share. On top of all that, the Fed cuts rates by a quarter point, giving the market what it wants, and stocks crater on Thursday.
So what's ahead ... more volatility?
Old Hungarian Proverb
There is nothing new in the markets as financial history always repeats itself, which reminds me of one of my favorite market quotes. The quote is from former Fed chairman Alan Greenspan. The term he came up with is "Irrational exuberance" in a speech given at the American Enterprise Institute during the stock market boom of the 1990s. The phrase was interpreted by financial pundits as a typically cryptic warning that the market might be overvalued.
Although it is sometimes believed that Greenspan's comment was made near the height of the dot-com boom (and contributed to its downfall), it was actually said much earlier, in December 1996. Read more about it on Wikipedia.
The subject of todays blog posting is something you need more than ever in these volatile markets and that is money management.
In my previous Friday blog postings we discussed diversification and stops. These two disciplines are all part of your money management suite of tools. But there are two other elements that make up a successful money management strategy in my opinion.
The two missing elements I am talking about are and the importance of using FOCUS and DISCIPLINE.. You must have these two elements in your money management toolbox if you are going to succeed and make the kind of money that allows you to enjoy the good life.
Just imagine not having to worry about Fed actions, or stressing out about if some companies earnings is going to miss expectations.
Well, all that is possible with good money management. The tools we have discussed in our previous posts stops and diversification allow you the luxury of not worrying and stressing out over things you cannot control.
THE NUMBER ONE SECRET TO MONEY MANAGEMENT
All credit goes to the Oracle of Omaha, Warren Buffett for this secret. Mr Buffett who at 77 is a legend in the investment world. Here are Mr. Buffett two most important rules to investing.
Rule Number One: Never lose money.
Rule Number Two: Never forget Rule Number One.
If you follow this advice you will be very successful, perhaps like Mr. Buffett?
We were lucky enough to recently share some TV time with Mr. Buffett. You can watch it here.
Let's go back to our two topics today ... FOCUS and DISCIPLINE.
Here's an example of FOCUS.
Say you are bullish on a certain stock or futures market. You need to FOCUS on three key components. 1. Entry price. 2. Trade risk. 3. Profit potential.
Here's an example of DISCIPLINE.
This is what I believe is the difference between winners and losers in the market.
It can be all summonded up in one word DISCIPLINE!!!
Without DISCIPLINE the odds of being successfull in the market are against you.
Here's a simple recap of the four basic components that make up your money management game plan.
1. DIVERSIFICATION
2. STOPS
3. FOCUS
4. DISCIPLINE
Once you have mastered these four elements there is no doubt that you will be successful.
Next week The Friday Focus will take on the biggest hurdle most traders face and that is the importance of psychology in trading. Till then ... have a great weekend and a super profitable trading week.
Adam Hewison
