US Dollar Index, Ready to Run or Roll?

US Dollar Index: Will it go up, will higher interest rates and worldwide conflict bring more money to the US dollar? Is this resistance, will the US dollar fall from here?

I don’t know for sure, but I try to let it run if I am right and lose small if I am wrong. I try to enter when I will have a little bit of wiggle room and time to maneuver in.

I have seen many different ways to win as an investor or trader. This is how I trade: For I am not a great stock picker, I am impatient, and have a low pain threshold.

I also use leverage. So if you are efficient (meaning you have a winning percentage, win more than you lose, and can prevent against a catastrophic loss … then leverage can only help. If one is inefficient, leverage will only make it worst.

Example: Which is better.

1. Choose a high beta vehicle, reward is 10, risk is 5 and the odds of winning are 50%. Well, 50% of the time you will win 10 = 50. 50% of the time you will lose 5 = 25. Your expected return is 25.

or

2. Choose a lower beta vehicle, reward is 3, risk is 1, and the odds of winning are 80%. Well, 80% of the time you will win 3 = 24. 20% of the time you will lose 1 = 5. Your expected return is 19. But, I can then use leverage. If I can use even 80% leverage (the leverage is greater with the futures), then that return is 5 times 19 = 95.

Now a profit of 95 from option 2 outweighs the profit of 40 from option 1.

But also the risk and the element of ruin.

With option 1, you should lose once every 2 trades and lose 50% of what your bet is. You chances of losing 2 in a row are 1 out of 4, to lose 3 in row it is 1 out of 8, 4 in a row is 1 out of 16.

With option 2, you change of losing is 1 in 5 trades, to lose 2 in a row is 1 out of 25, 3 in a row is 1 out of 125, etc.

What if we only won 50% of our trades? Well that depends also on what our return to risk ratio is. What we actually win when we do and what we actually lose in reality. On paper, in hindsight, it is easy to paper trade and back test, but also, how hard or easy is it to manage the trade as it evolves.

This is the US Dollar Index – From the first 6 trades, there are 2 losers and 4 winners. The winners are larger than the losers. It is important to me to keep the losers tolerable so that it does not affect my capital, the element of ruin, blowing up, and does not affect me emotionally.

On the next 4 trades, I try to enter where I will have a little bit of wiggle room (meaning in price fluctuation and time). This way I can get out with a small profit, even, or a small loss. Notice how drawing the trend lines with too steep and angle, being impatient of missing the move can whip me around. But on the last of the 4 trades … the profit makes up for all the 3 jiggle jaggles.

People like the Warren Buffet and Peter Lynch of the past would just buy and bet on the company. They had a lot more money and patience than I do, they can dollar cost average and endure pain. Warren Buffet was down about 40% in the last 24 months before the dot com top.

For every 10 stocks that he and Peter Lynch would buy with even money, there were perhaps 4 average performers, 2 below average, 2 above average, maybe 1 could be a big loser, but maybe 1 would go up 4 times or more, and that would more than take care of the 1 big loser.

Imagine you are the general manager of an NBA team, you want to keep the stars and cut the under performers if you can afford it.

The same with your holdings or trades, you let your profits run. Perhaps the stock is breaking out and in favor, gaining favor, etc. If the stock is running, it is doing so for a reason. It is a trending vehicle, humans are creatures of habit and are subjected to trends too.

Money managers have to keep up with the averages or risk getting fired. Does demand create rising prices or does rising prices create demand? Or both? Everyone loves a winner?

Perhaps the stock moves up a notch in market cap … that means more institutions limited by guidelines are able to buy it.

And the reverse happens when a stock goes out of favor.

But what happens so often … when you analyze and look at a longer term portfolio of an investor …. the great ones will hold and let the winners run, and will have cut the losses short on the losers.

An average investor will have kept both the winners and the losers.

A mediocre investor will have sold all the winners and kept all the losers.