Brainless Strategy Sometimes Really Works

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When I have just started learning to invest, there were advises I learned over my reading. One of the advises said news and analytical reports sometimes are not accurate. They can serve as a distraction for your investment. No one really can predict market direction and its future with accuracy. It is better to hide in a place where no economic news can reach you. Your investment could probably have a better performance than invest following news and analytical report.

Interestingly my stock remisier is a chartist. He invests according to his own chart analysis, not anything from the news. He purposely refrains himself from listening or contacting any market news. Those were just noises and distractions. I heard that he has good performance as a result. Sometimes, brainless investment strategy might work too. Thinking and analyzing too much sometimes might be futile and hopeless.

Brainless Strategy

In investment practices, there is no perfect investment strategy. No one really knows how markets behave. Market trend always develops ahead of any news. By the time you know it, it is often too late.   

In my investment class, I do introduce a brainless investment strategy. That investment strategy is called Trailing Stop Loss.  In this strategy, I advise the investor to watch every profiting investment and take profit whenever it hits your intended drop.

This strategy developed from the strategy of stop loss. (For other discussions on stop loss, please read previous articles.) First, you need to establish an allowable loss percentage, say 5 or 10% for your investment. Regardless of market conditions, you are going to pull out your fund as long as it hits your allowable losses.  If your investment does not incur losses but develops into a profiting condition, you may still want to apply this stop-loss strategy. You will count your allowable “losses” (now it turns to be a “retrieve”, not a loss) from the highest point your fund has reached. If it drops to your allowable point, you will pull out your invested fund, so that you can take your profit home. If you do not do that, you would probably lose all your profit ever accumulated later.

Gold Price Retrieval

 A perfect example can be applied to the gold related funds recently. As gold was shooting perfectly well in the past several months (chart A). But it has retrieved more than 13% lately. If you were to have invested in Precious Metals Securities fund, for example, at the low point marked “A” somewhere around May 2019, you would have seen your profit have accumulated up to 31% at the highest point marked as “B” at early September 2019. From there, the price has dropped down to the point marked as “C.” The retrieval extent would be -13.8% from its top.

If you have a stop-loss point at 7%, you would have taken home a profit of 24% (31%-7%). I called this the “Trailing Stop Loss.” But if you did not do this trailing stop loss, you will see your profit has already shrunk down to 17.2% by now. Worst of all, you might have lost it all if gold continues diving to the south. 

At this point, we don’t really know whether gold will rebound, or whether it has hit the bottom. Looking at global trade development, no one really knows with certainty, whether China and the US are going to sign the first phase trade agreement. It is all up to everyone’s speculation as of today. What a futile and tiring guess, won’t it better if we were to employ trailing stop loss, a brainless strategy?

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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions.  This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to conclude individual decision.

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