Strategy #1 So let's suppose that a trader has 6 long positions in a bull market and is risking no more than 2% on each trade. That would be a total risk to the account of 12%. Let's call this Strategy #1.Furthermore, let's assume that the trading method used by this trader is expected to yield an average of 5% (of the trader's account size) profit for profitable trades. If the bull market continues, it is possible that all 6 positions would be profitable, averaging 5% profit each or a gain of 30% to the account. Of course, even though the bull market continues there is no assurance that all 6 positions would be profitable, but let's assume that is the case in this example. But what happens if just after putting these long positions on, the market abruptly drops like it did in February. In that case, all 6 positions could have been stopped out, easily losing 2% each or a loss of 12% to the account. Strategy #2 Now using those same market scenarios, this time let's assume that a trader has 4 long positions in a bull market, but also has 2 short positions. Let's call this Strategy #2. Each position is risking no more than 2% on each trade. That would still be a total risk to the account of 12% as it was with Strategy #1. But this time 2 of those 6 positions are shorts, which have a high probability of significantly reducing the risk to the account. Again, let's assume that the trading method used by this trader is expected to yield an average of 5% profit for each profitable trade. If the bull market continues, it is possible that all 4 long positions would be profitable, averaging 5% profit each or a gain of 20% to the account. But this could be offset somewhat by the short trades that could have been stopped out for a 2% loss on each trade or a loss of 4% to the account. The net effect being a gain of 16% to the account (+20% on the longs, ?4% on the shorts) Not as good as the 30% gain with Strategy #1, but let's see what could happen if just after putting these positions on (both the longs and the shorts), the market abruptly drops. In that case, all 4 long positions could have been stopped out, easily losing 2% each or a loss of 8% to the account. Now for the good news - with the 2 short trades as a hedge, both of those trades could have averaged 5% profit or a gain of 10% to the account. The net effect being a gain of 2% to the account (-8% on the longs, +10% on the shorts). So, with Strategy #2, while the theoretical profit potential is not as high if the bull market continues, the theoretical outcome if the market drops abruptly is still a gain of 2%, while in the first example, with all 6 positions being long the account could have lost 12%. The table on the previous page summarizes these examples for the two market scenarios. Since the market is unforecastable, in order to protect your account from excessive losses, I believe you must employ some type of hedging strategy such as I have outlined above as Strategy #2. By definition, a hedging strategy has a cost to it. In this case in the form of lesser gains should the bull market continue. But I believe that such a hedge is well worth it if it can minimize losses or even produce a net profit when the market goes against me. And don't forget, the market does not have to fall abruptly for Strategy #2 to be effective. Even in a protracted bull market, there will often times be frequent corrections downward that can easily produce similar outcomes to the scenarios above.Strategy #2 can, of course, also be applied in a bear market by putting on 4 short positions and 2 long positions. I would also like to point out, for option-savvy traders, that the creative use of options can also be used as an effective hedging strategy. But a word of caution: do not trade options unless you have had the proper education.
A Few Caveats In the preceding scenarios, the trade outcomes could clearly be different than those assumed. Some of the profitable longs and shorts could have been more or less profitable or even losers. And some of the losing longs and shorts could have been profitable or even lost more, but I think you get the point of how a simple hedging program can be used to dramatically reduce risk to the trading account. Important! When using a hedging strategy like Strategy #2, always be sure to only consider trades that your trading method tells you to consider. In other words, in a bull market, for example, only put shorts on as a hedge that your trading method tells you are potentially good short opportunities.
The Trend Finder Now, many have asked, ?How do I determine whether or not it is a bull or bear market, anyway?? Or, ?I can't really hedge the market if I don't know what the trend is.? These are very important questions, because most of the advice we get on these questions from the analysts, the so-called experts, the media, you name it, is just not very helpful. And to make matters worse, these experts often disagree on whether it's a bull or a bear. Now imagine if there was an objective way to determine the trend of the overall market that anyone can follow. Well, thankfully there is. Here is a simple method that I have developed to determine overall market trend at all times. While no method will identify tops and bottoms with any accuracy (and don't believe anyone who tells you differently), my method will keep you on the right side of the market most of the time. This is the method that I use in determining a bull or bear market with my hedging strategy I described earlier.
The Formula
When the 50 and 200 day simple moving averages for the S&P 500 are both up, I consider the market to be in a strong bull run and recommend trading twice as many long positions as short positions. If both are down, I consider the market to be in a strong bear run and I recommend trading twice as many short positions as long positions. If one is up and the other down, I consider the market to be a mixed, choppy affair. If a mixed choppy market, I recommend cutting back on position size and number of positions and recommend trading an equal number of long and short positions. I have found this simple approach to be far superior to any guru's or media forecast on market direction. Now, in case you think this method is too simple, I would urge you to plot these moving averages on a historical chart of the S&P 500 and see for yourself how useful this method is in identifying bull and bear markets. Take a look at the chart above and on the next page for a few examples of this. Remember, simple, but no simpler.
So What Now?
The bottom line is that controlling your emotions and trading with discipline are essential to becoming a successful trader. And I believe the number one nemesis for anyone in this regard is stress. When under stress, you become emotional, are prone to making mistakes and will tend to become undisciplined. So why trade assuming that the market will always go your way, throwing caution to the wind, and setting yourself up for unwanted stress? With the proper hedging strategy and willingness to absorb the relatively small cost of hedging, you can largely avoid stress and stay focused, emotionally in control and disciplined because you have already taken steps to deal with a market move against you long before it happens. And those market moves will happen. Again and again.
Trading Education & Market Direction
So here's the bottom line? Real traders don't get spooked when the market drops out like it did in February. That's because they have the potential to make money no matter which way the market moves. When the market is trending up, their method gets them into long positions. And when the market heads south, their method gets them in short positions. And incidentally, in a bear market prices tend to drop more quickly than prices go up in a bull market. This is great news when your trading method identifies short-trading opportunities. So as you can probably tell, all this ?noise? in the news about the market falling out doesn't bother me. And it shouldn't bother you, either, if you have a good trading method. On the other hand, if you are confused, anxious, and don't know what your next move should be in the market, then I believe you need to get properly educated immediately and get your hands on a good trading method. In fact, I would argue that now is the perfect time to study a new trading method, practice paper trading it, and learn it cold. Then, when the next big market trend hits, you'll be poised to potentially pull profits out of that trend. However, if you wait for the next big trend to rear its head and you're still making trading decisions in an uneducated, ?willy-nilly? fashion, you'll be scrambling for cover when your positions go against you. My kids call me ?old school? because I believe in studying, taking your time, and putting ?sweat equity? and ?elbow grease? into any endeavor that you pursue in life. Trading is no different, and there's no better time to start learning how to trade properly than the present. So, buckle down, sharpen your pencil, and get up close and personal with a good trading method today, not tomorrow. One final comment on trading education in general, and you may have heard this before. When you want to learn anything new, you're going to pay for it. Period. You're going to pay for it with time, with money, or both. And what I learned with regard to trading is that you can either pay the markets, or you can pay a mentor. Particularly with trading, I believe it's vastly more economical to pay a mentor.
Good trading,
Bill Poulos
p.s. If you'd like to download this entire article, just go to http://www.pruntracker.com/Nav2007
In my years of coaching, I've worked with a variety of leaders who were known for delivering results consistently on time and on budget. Along with their reputation for delivery came the reputation of driver, pace setter, or taskmaster. Most were proud of this reputation and believed they were doing "what they were paid to do." However, in their drive to deliver results, they often left more than a few people battered and bruised along the way. They didn't realize that over time, feelings of intimidation among the troops would build up to the point of creating barriers to progress. These leaders were unknowingly creating a negative emotional wake.
Often in heated or charged conversations we are so focused on what we want to say and how we feel that we don't pay attention to the impact our words, tone and body language have on other people. How do people feel when you leave? Are they fired up and motivated or are they depressed and defeated? Do they feel listened to, valued and trusted? Or do they feel mowed over, dispensable and micro-managed?
The feelings you leave people with after a conversation constitute your emotional wake. It determines how people feel about you, what they think of you and what they tell others about you. It also profoundly affects the culture of your team and larger organization.
One of the goals of a fierce conversation is to leave a positive emotional wake where both parties walk away with a deeper understanding and commitment. If people have to spend their time licking wounds and dressing bruises, the only understanding they'll have is that you are someone to be avoided and defended against.
For a leader, whether official or unofficial, there is no trivial comment. An off-handed comment you don't even remember saying can have a devastating impact on someone looking to you for guidance and approval. At the same time, something you said months or years ago may have encouraged and inspired someone who is grateful to you to this day.
A negative emotional wake is not just created by what you say; it can also be created by what you don't say. Not telling people that you appreciate the work they have done or what they mean to you will leave the impression that you don't value them and their efforts. When people don't feel appreciated a culture of indifference and apathy begins to take root. Everybody (including you) needs to feel valued and know that their efforts are appreciated.
Tips for Understanding Your Emotional Wake
There are times in the work place and in our personal lives when we need to bring up controversial or potentially upsetting issues. In order to leave a positive wake and reduce the chance of an inaccurate spin being attached to what you say, learn to deliver the message without the "load." The "load" is a negative charge. You can deliver a negative load in several ways. If you are engaging in any of the following behaviors, there's a good chance you are leaving a negative emotional wake: ? Blaming ? Name calling, labeling ? Using sarcasm ? Exaggerating ? Giving unsolicited advice ? Pointing to someone else's failure to communicate ? Assuming a position of superiority ? Character assassination ? Making blatantly negative facial expressions ? Being unresponsive, refusing to speak
At times it can be tough to gauge our emotional wake especially if we are scared or confused on some level ourselves. The following is a list of clues that are warnings you might be leaving a negative emotional wake: ? You feel like you aren't connecting with your people. You're talking and they're nodding their heads but that doesn't seem to translate into action. ? You stop receiving confirming or positive feedback from those with whom you are communicating. ? You notice that others are displaying closed body language around you. ? You begin to feel like your people are expending extra energy on gaining your approval or the approval of others. ? You feel like people are not taking their own initiative.
Leadership is not always pretty. There are times when we have to tell people things they don't want to hear. The tricky part is that different people need different things and receive information in different ways. You can profoundly impact the way your message is received with some planning and forethought. Start by thinking about your audience and how they are most likely to receive the information. What are they worried about? How can you mitigate their concerns? How can you present your message so it doesn't come across as blaming or an attempt to make them feel guilty?
If you are uncertain about how your message is coming across, test it out on a trusted colleague first. Then after you've given your message, ask for feedback. Ask trusted co-workers how it came across and how they thought you were trying to make people feel.
The Paradox of Authenticity
People can tell when you aren't saying what you really think. When people sense that your words and actions are not congruent with your feelings, they will discount your message. This is why another important aspect of fierce conversations is authenticity. To a large degree authenticity is defined by what others see in you. If authenticity were purely an innate quality, you couldn't do much to impact it. Fortunately there are things you can do to manage the perception of authenticity.
Most people think of authenticity as being straightforward, "telling it like it is" and being sincere. I wouldn't exactly say that's an inaccurate definition; it just doesn't tell the whole story. People who assume they are being authentic when they express their thoughts and opinions in an uncontrolled manner inevitably wind up leaving a negative emotional wake.
One of the reasons I hear for not considering how a message is delivered from hard-charging executives is, "This is who I am and they just have to accept me the way I am." I don't mean to imply that you have to be "nice" all the time but part of becoming a better leader means having good boundaries and knowing when to be tough while still delivering your message effectively.
Authenticity is not the product of pure manipulation. It accurately reflects aspects of the leader's inner self, so it can't be an act. But great leaders seem to know which personality traits they should reveal to whom and when. The paradox of authenticity is that you have to be able to adjust and adapt what you say and you have to do it in a way that is congruent with who you are. The challenge is to find a balance between being true to yourself and the exercise of leadership.
Managing the Perception
Establishing your authenticity as a leader is a two-part challenge. The first is to ensure that your words are consistent with your deeds. A great leader constantly strives to "walk the walk." The second is finding common ground with the people you are trying to influence.
Leaders need to possess self-knowledge, but great leaders have to be able to recognize which aspects of their authentic selves particular groups are looking for and have the willingness and ability to share it with others. By authentically sharing and listening in a way that creates common ground, you can positively impact the emotional wake you leave.
Conclusion
We've covered a lot of ground in these articles on fierce conversations: from ground truth to mineral rights, to the power of listening and silence, to managing your emotional wake and authenticity. All of these topics are crucial skills for people who want to be great leaders and create a fulfilling and successful organization. The hard part is knowing how to "get from here to there."
Most people develop these skills through trial and error over the course of several years. In the current economic environment, many businesses don't have the luxury of this rather inefficient method; that's where coaching comes in. Coaching works with the individual, the team and the larger organization to help each person build their own awareness, build their repertoire of communication skills, enable them to better read others, tune into feedback and consciously decide what to do with it. Through the coaching process, skills that would have taken a career to develop can be learned in months.
Both Bill Poulos & Tim Link are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Bill Poulos has sinced written about articles on various topics from Recreation and Sports, Stock. Bill Poulos has been trading the markets since 1974. He's a retired automotive executive who holds a bachelor's degree in Industrial Engineering, and a Master's degree in Business Administration, with a major in Finance.In his over 30 years of trading exp. Bill Poulos's top article generates over 8100 views. to your Favourites.
Tim Link has sinced written about articles on various topics from Stock, Allergies. Tim Link is an executive coach and management consultant with a record of successfully guiding leaders and organizations from small business through Fortune 50 to increased employee productivity and satisfaction. Link Resource Group provides customized bu. Tim Link's top article generates over 4400 views. to your Favourites.