Quite often I bought a stock on my margin account on the assumption that it will keep on rising (or aka on my greed) and that the company has several fundamental appeals. It turned out that sometimes I was wrong, stock price fell, and I blamed myself as the stupidest person on Earth. I couldn't care less about the "fundamental appeals" because it is just a trading position, and I don't want to stick with it for long.
Currently, my rules for leveraged trading are:
- Buy stocks on high probability: that is stock price fall sharply to an extreme oversold level. That has been serving me well.
However, there are times that I "need" to take leveraged positions, even when the market is not oversold. That is because:
- I am fully invested on good stocks that I plan to hold on forever. I am quite happy and comfortable with the core long-term holding that I have no wish to reduce holdings in those to buy new stocks.
- The market is either rising, or flat, or declining. But not in an OVERSOLD.
It is apparent that there are decent opportunities that I could leverage on to make some quick buck, and that would be to wasteful to be blindside with current rules. However, I don't want to have a buyer's remorse, that later I have to deal with painful emotion of being a stupid greedy trader. I need a template to buy on to deal with.
From market big picture to principles and tactics:
1. Current global markets conditions.
- Do the global markets condition justify a leveraged position?
- On what basis the leveraged position based on? In order to perform does the stock intended to buy need:
i. stabilized global equity market?
ii. stabilized global commodity market?
- How likely are the factors mentioned above moving other ways around?
2. Current domestic market conditions.
- How is the market? Is the market prone to a pullback? (remember that I am for a trading position, therefore a slight pullback might hurt.)
- Relevant behavior of Vietnam stock market participants?
- Anything relevant to the stock to support it? Anything that would hurt it? Why there is evidence that the risk/reward ratio is in my favor?
3. My current position.
- Current leveraged position. What if the market is down by 5% How much does it hurt in my overall portfolio in terms of % performance, and of absolute dollar amount ?
- What are my other targets in the next 3, 6, 12 months. Is there chances that if I buy the stock, I might run out of ammo to buy the other more attractive target?
- Am I late to the game, or early? Has the stock ran for a while? Or starts turning? Or is it a contrarian play, and it hasn't gone up at all?
- What if the market change its perception against the stock? What if it goes down by 15-20%?
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