-> Why you should concentrate on a few stocks.
Thanks for taking the time to read today's blog post in this blog we take a look at price movement through the use of technical analysis to make money in the market and why we want to make large concentrated bets.
"Don't put all your eggs in one basket!"
I am sure if you are a trader or investor you have heard this over and over again and it has been repeated so much that every time you see it on #CNBC your eyeballs bleed. These Financial Channels aren't here to make you money, they exist for you to make them money. Eyeballs sell ads, I am sorry to say they don't care what Desiree from Texas is doing with her money.
Even I was taught it in Business School, where I spent $50k a year to attend! While I love Ithaca College, my alma mater, I have found for several reasons this is not only wrong it can hurt your long term performance. As traders and investors we are here to make money, therefore we have to increase our risk, but in a diligent way.
Recently, I created an Elliot Wave Analysis that ended up precluding the recent bottom in #Gamestop, a meme stock that we have touched upon several times on twitter and the blog. This offered an asymmetric risk/reward opportunity to get very long GameStop and then add to that position as it went our way. To me this was a perfect opportunity to concentrate a position in GameStop, one that we know #fintwit has been following for quite sometime.
So then why is it a good idea as trader or investor to have concentrated bets in a few stocks where you have lost of conviction? Five reasons:
Concentrated bets means you have more time to manage your entries and exits on positions,
You can start out with a smaller position and then add to that position as the trade or investment idea continues to work for you,
You cut your losses quicker,
You can focus on the strongest and ignore the weakest stocks more easily, and,
You ignore the noise!
While it may seem counterintuitive to do this you actually start taking on more risk when you are holding 35 or 40 names. If you want to see a prime example of this look no further than Cathie Wood's $ARK recently, they're holding a plethora of names and a lot of their entries from my perspective are suboptimal. While I understand their mission, they are a long only fund investing in groundbreaking tech, they sometimes add to positions that are going down in value.
Can you imagine trying to manage 35-40 names in a portfolio? Now imagine doing that for several clients across different trading applications, insanity! Your entries and exits will be poor, every time a piece of news comes out you going to see if it impacts the price of those holdings, and while you're doing that you are not concentrating on a stock that may show a loss that may move against you quickly in the opposite position. OK...Miguel we get it, so what does this have to do with GameStop?
Look at our entry and exit on it! When we took the time to create an Elliot Wave Analysis we were able to not only exit our short options position near the bottom, we also then immediately flipped long! To me this shows the power of concentrating on a few positions and taking our time. So what's next!?
Now, we can take a look at GameStop on a larger timeframe, in the last blog post we did we weren't sure it could make all time highs because of prior people buying at the top during the media frenzy. We have worked that off and we are now creating bullish symmetrical triangle on the weekly chart. If we break and hold over this pattern we should see all time highs faster than you can load a game cartridge into an Super Nintendo!
Thanks for doing yourself a favor and educating yourself by reading this blog post. If you liked this one be sure to check our others out and remember to Trade Confidently!
Miguel Ferreira (@wizdaytrader)
Essex's Trading Quote of the Day (QotD)
“Put all your eggs in one basket and watch the basket carefully.”