The "secret" ingredients

To be successful in the markets you need to know:

– what to buy (equity selection);

– When to buy it and when to pass on it (risk management);

– When to exit (time management).

The most essential part of equity selection is finding/creating a trading system with positive expectancy. Look for the catalyst/catalysts than has/have the potential to start a big move in the desired direction. There are two catalysts I focus on – earnings related and sector related. I pay attention to price, because it measures the only factor than really moves markets – confidence. It always says more than any other source of information. Reaction to news is more important to news itself.

Risk management has two basic elements: defining risk/reward ratio for every position I consider to get involved in and position sizing (how much to buy, what % of capital to put on risk).

Time management involves taking into account the opportunity cost. How long to stay in a position?

Discipline

It’s the greed factor that corrupts the way people think in this business. Unfortunately, I needed a 6 fig loss to remind me how stupid greed can make a person. Needless to say, from here on, or until I recover some of these losses, trading will be disciplined.

The Fly

China allows short selling and margin purchases

Sept. 26 (Bloomberg) — China’s cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia’s second-largest market after prices and trading volumes slumped, an official familiar with the plan said.

China’s government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.

China has scrapped the tax on stock purchases and relaxed company buyback rules to help support the world’s second-worst performing stock market this year.

The CSI 300 rose 0.9 percent today and added 8.2 percent this week, the first weekly gain in nine weeks.

On short selling

Selling borrowed stocks serves as a balance to buying stocks with borrowed money.

Careless leveraging will always cause greater evil than any size of short selling.

Short selling reduces volatility, cuts the bid/ask spread, makes the market more predictable.

Short selling provides healthier, higher quality market.