Traders often wonder about the factors that lead experienced investors and large investment firms to consistently achieve profits. It turns out, the key to their success lies in implementing specific rules in trading, both in the forex market and other financial asset markets. In the latest newsletter, Boris Schlossberg, Kathy Lien's partner at BK Asset Management, shares these rules, revealing the essence of Josh Brown's investment column titled "How to Make Volatility Your B****".
1. Dollar-Cost Averaging (DCA) Strategy:
DCA is a strategy of buying investment assets with a fixed dollar amount regularly, regardless of the price of the asset or stock. For example, if you decide to buy XYZ stock every month for $100, you'll get more shares when the price is low and fewer shares when the price is high. This strategy is considered the best investment approach because it creates a favorable average price.
2. The Law of Large Numbers:
- The success of the DCA strategy depends on the natural movements of the stock market and the principle of the "law of large numbers." This principle states that investment returns will almost always meet expectations as long as the sample size is large enough. In other words, it's better to divide investment risk into small portions and open many trading positions to increase long-term profit opportunities.
3. Small Size Trading:
- Schlossberg emphasizes the importance of trading in small sizes. Traders need to make many trades with small asset sizes to withstand a series of unavoidable losses. This allows traders to remain calm and execute strategies effectively, regardless of market pressure.
4. Risk Management:
The success of trading strategies also depends on good risk control. Traders should manage risks wisely and understand that some positions may yield lower or even negative returns. However, with proper risk management, the overall portfolio value can continue to increase over the long term.
5. Combining the Law of Large Numbers with Trading Algorithms:
- Large investment firms employing High-Frequency Trading (HFT), such as Virtu, have successfully combined the "law of large numbers" principle with sophisticated trading algorithms. While individual traders don't need to replicate them exactly, they can adopt a similar approach by reducing trading size and dividing risks into small portions.
The success of great traders lies not only in trading strategies but also in the implementation of hidden rules, such as DCA, the law of large numbers, and wise risk management. Trading in small sizes can enhance performance and ensure long-term success. By understanding and incorporating these elements, traders can achieve consistent profits and minimize the risk of losses.
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