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Investing - How To Profit Using Formulas

A classic Wall Street yarn, concerning a young man who was in the early stages of learning to be a professional speculator goes something like this. The young man had a problem, so he went to an elderly gentleman noted for his shrewd investment judgment, for advice. The young man had taken on quite an extensive line of stocks, but the market looked a bit over-valued and so he was thinking that his positions carried too many risks. He wondered if he shouldn't perhaps sell. He was so worried about it that he was having trouble sleeping.

The old man's advice was simple and direct: "Sell" he said. "Sell back to the sleeping point." Although there is no doubt that this advice smacks of ambiguity, there is a simple wisdom in it. We may safely assume that neither the young man nor his elder adviser knew which way the market was going, but both were aware that the market was sufficiently shaky to cause legitimate worry. Translated into somewhat more orthodox investment terms, the advice meant - Sell enough of your stocks so that a market collapse won't destroy you, but keep enough so that if your fears turn out to be groundless, and the market rises, you'll still profit to some extent - in the meantime, get some sleep.

At first glance, it may seem a bit cynical on the old man's part not to outline for his young disciple an exact and detailed course of action. But he couldn't be honest and at the same time guarantee that he knew exactly what action might turn out to be best. Furthermore, the young man didn't want someone to tell him precisely what to do. All he wanted was some help in easing the pressure and the help he received was clearly sensible.

How to Find the Sleeping Point In a real sense, investment formulas are designed to help you in the same way that the old man's advice helped his young friend - they inject an element of caution in your investing when caution seems advisable, they reduce the provision for caution when risks seem relatively low and permit you to benefit when prices rise. In addition, once you incorporate a formula into your investment program, it works more or less automatically, allowing you to sleep nights in the full knowledge that you are continuously hedged against various unforeseen possibilities.

But just as the investment sage left it up to the young man to decide exactly what his "sleeping point" might be, you

can select a formula appropriate to your own temperament, financial circumstances and proclivity to insomnia. Any formula can be adjusted to suit the needs and preferences of any investor.

Although formulas are designed to give un-hedged, unambiguous and unbiased indications for action, the investor should not feel that he is surrendering all personal control over his investments when he adopts a formula. The reason behind this logic is clear. It's because each investor selects the formula that will fit his own individual comfort level. A formula doesn't try to tell you what to do - it merely helps you do what you are already doing more profitably. For example, formulas cannot tell you which stocks to buy or currency to trade.

The whole premise of using formulas is based on the fact that those using them are normally quite sophisticated and that they know what kind of investment vehicle they are interested in, how to select them and where to go for advice in their particular area(s) of interest. However, by supplementing their knowledge with considerations of the equally important questions of when to own and in what quantity - formulas can supply a valuable added dimension to their investment results and assist in the management of their portfolio on a more professional level.

Along this same line, it is worth mentioning that although the true purpose of a formula is to supply the investor with an investment policy which is definite in its instructions at all times, you need not feel that you must follow the formula precisely in order to profit from it. You cannot, of course, ignore it altogether if you expect to benefit from it, but you can profitably use it as a touchstone or a general guide without swearing eternal allegiance to its dictates. You might, for example, want to use a formula, but also desire to increase or decrease your risks at various times for a variety of reasons. Your use of the formula will show you how far you are departing from your original plan and will give you a well-ordered program to come back to when you are ready.

This article may be reproduced only in its entirety.

About the author:

Kevin Erickson is a contributing writer to: Forex Trading | Work At Home | Nursing School
 
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.

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