Two Choices

Discussion in 'Trading' started by ByLoSellHi, May 3, 2007.

  1. You have one of two choices.

    This is obviously a hypothetical question.

    There is a known 50% chance of a 10% market correction no later than 90 days from today.

    The correction may occur at any time with the next 90 days, however, and will be a one day correction.

    (Assume that you can not short the market based on this fact set)

    Your two choices are:

    a) You can immediately exit all your long positions.

    b) You can remain in the market for an additional 45 days, at a minimum. In other words, you can not exit your long positions at any time prior to the 46th from today, if you did not choose option a).
  2. Jonathan


    I pick A.

    I have no problem with leaving excess profits on the table. :)
  3. Based on the options, I also choose "A". No problem with early exit. And I can make money scalping and eod-flat the 90 day period. Likely more money than buy and hold for the period because ups AND down can be traded, with quantifiably less market exposure. :)
  4. gov


    You must be going through a phase. Here, let me help. Pull up a long term chart. See how the averages are all going up? That is a bull market. Bull market=BUY.

    It is pretty long in the tooth, true, but until a change occurs...

    I do notice that you seem to waffle around, sometimes terribly negative, other times bullish. Simplify your way to emotional stability. Realize you cannot ever know the future; take a look at the now and do what works now. This speeds you on your way to your future. Think heuristically. And on that note, here is a simple axiom for trading: AccountBalanceUp=good, AccountSuckingAss=bad.

    Trade Well and Prosper! [I think this is a quote from some pointy-eared guy on tv]
  5. I am just posing the question to see if anyone is able to quantify the risk/reward profile of each choice.

    It's not a reflection of my current sentiment towards the market, as it is a hypothetical.
  6. gov


    Yes, ok, I'll bite. Given what is known from the statement, and of course what is then explicitly unknown, I would say the reasonable action would be to exit at market. But it is close. Since there is a .5 chance that I'll loose 10%, that yields a -5% expectancy. But, this is not correct, since I must expose myself to only the first 45 days. Therefore, at the outset, I have about [1/90][.5][10%]=0.06 percent negative expectancy with this correction. Each day my negative expectancy gets larger by this amount, until day 45 where I have at negative expectancy of 2.5 percent. However, I could miss the event entirely if it occurred in the second 45 days, and furthermore from the outset, every day I stay I am increasing my risk of the event happening to me, until on day 90 there is a 50-50 chance of it happening.

    I think ultimately my decision would ride on how much upside I felt there was in the next 45 days. Given right now, with May here, I would exit. If I thought the period was seasonably strong, I would push the first 45 days for sure, then exit at the earliest opportunity.

    My statistics are rusty (very rusty) but this is my first thought on the matter and maybe a good starting point. If it's all wrong, oh well, you get what you pay for...:D
  7. Since this is not what happens in the world, it is a useless question. It is like saying "your wife and your little sister are drowning, which will you save?"

    Hypothetical, rigid questions will not lead to any productive results. because when it REALLY comes to play, people often do quite differently from what they say.

    Only idiots don't take appropriate trade/money management steps based on present conditions.
  8. What's the upside potential within the same period?
  9. hels02


    This question has too many variables to answer rationally.

    On THE MOST SIMPLISTIC level, assuming you are 100% in DJX, and you are ONLY looking at that one number (and not QQQQ, or anything else).

    Lets take the only 3 possible situations (with the numbers changing):
    1. The market goes up 10% over the next 60 days. Then it crashes 10%. Ie., the market goes up for the same amount as the crash in 60 days (plug in whatever % you like).

    You are flat. You have neither made nor lost $$.

    2. The market goes up 15%. It crashes for 10%. You are up 5%. Ie., the market goes up for more than it crashes (plug in whatever % you like).

    Exiting now is a lose for you.

    3. The market goes up 15%. It crashes for 20%. You are down 5%. Ie., the market goes up for LESS than it crashes (plug in whatever numbers you like).

    Exiting now would preserve 5% of your current capital.

    Which would it be? You do not know, you cannot know.

    Add in the vagaries of individual stocks or other indexes... and it boils down to 1 thing and 1 thing only... your stock selection.

    During a crash, some stocks go up. Not many, but there are always those who buck the trend... shorts taking the opportunity to GET OUT NOW, people seeing that they cannot get a better deal, etc etc.

    Some stocks will fall very little relative to the greater loss in the market... their fundamentals are fantastic, and no one wants to sell them... they'll sell all their dogs, but not this (and MOST DJ stocks are in this boat). So these stocks, fall 5%, when the greater market average is down 10%.

    Some stocks will fall 40-60%.... this happens. When the market crashes, EVERYONE bails from the 'risky' stuff. The actual percentage drop overall says very little about the impact on individual stocks.

    So here's the best advice, and I'd like to see someone come up with better.

    If you are that worried about a market drop, but you feel comfortable with the bull market and believe in a continuing uptrend, the smart thing to do is flight to quality.

    THIS is why the DOW is going up. Ok?

    I define flight to quality as checking the PE, ROI, cash on hand, projected income, the size of the moat, the $$ they'd make if we had a recession, how much international business they do (because as the dollar gets cheaper... they make more $$ relatively, and are more competitive internationally), etc etc.

    Ie., screw the momo and the TA. When you are scared, you buy the very very best and hang on.

    Or... you get out now and lose the potential profit til the fall. Problem is, you do not know when the fall is coming, and you can lose a LOT between here and there.

    On the other hand, sitting in cash and buying in at the bottom is of course the most profitable method of all.... but what if you have to wait 4 months instead of 2? Or 9 months? You lose a crapload in the meantime.