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Case Study: Building On The Weakest Link

Long Term Stock Market SuccessTravis W. lives in Louisville Kentucky. He's a busy Dad of two young boys with a demanding job as a domestic pilot for UPS. About 4-years ago he read Meb Faber's paper on the Ivy Portfolio which led him down the path of momentum investing.

Over the next few years Travis invested several hundred hours of individual study and testing before live trading an options strategy designed to make him a steady return during sideways markets. He also has invested some assets with professional commodity funds (CTAs) which tend to perform well during sustained bear markets.

However he felt his weakest link in the portfolio was exposure to stocks in a strong bull market. His performance goal for such a strategy was to produce returns exceeding 20% p.a. and be willing to accept higher risks to do so.

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Buy Strong or Buy Weak?

equity growth chartWe've previously investigated buying weak vs buying strong stocks on an annual basis, specifically buying the strongest (weakest) for the year, holding for the following year, then repeating.

What we found is a lot can go wrong with an already struggling company in the space of a year.

And not many people can sit back and let things go from bad to worse.

We only need to take a quick look at Retail Food Group (RFG) to feel that pain.

But what if we look to adjust the portfolio every month rather than every year?

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The Psychology of Trading

Robust SystemIt took a long time for me to understand the importance of psychology in trading. 

About 15 years ago I came across a book, 'The Disciplined Trader' by Mark Douglas.

It was a revelation.

I had a good grasp of trading fundamentals. Plus a strong and workable rules-based trading strategy centered on technical analysis.

Yet, after reading The Disciplined Trader (twice) I realised, in Mark Douglas's words, that successful trading is 80% psychological and only 20% method.

And it was the less obvious psychological aspects of trading that in my first few years as a trader were letting me down.

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Skip Day Strategy

laptop relaxed manA key philosophy I use in the Trading System Mentor Course is to have students understand why their strategy makes money.

What's the profit driver logic?

It's an important element to grasp for two reasons;

Firstly, when things get a little tough, which they always will, you'll be more inclined to stay with a system you fully understand.

If you don't understand, you'll tend to drop it and fall into the beginner's cycle.

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