Capital Exhaustion at Entry
There are many frustrating laws in the trading market, such as:
- Whenever you need money, the market crashes!
- It might not seem logically supported, so you might temporarily doubt it, but you will definitely experience the power of this law.
- For all beginners, this law is almost eternally true:
- As soon as you buy, it starts falling;
- As soon as you sell, it starts rising…
Why does this paradoxical situation occur? Because the fundamental reason for the end of every market cycle is capital exhaustion at entry. In other words, when even the auntie selling tea eggs on the street starts discussing stocks, the market’s “entry capital” is already on the verge of running out… Think about it: even someone completely unrelated to the topic knows this. When it’s time to rush in and make money, doesn’t that mean the market cycle is over?
Mending the Pen After the Sheep is Lost Has Prerequisites
- You don’t just have the one sheep that was lost;
- Besides it, you should have many other sheep;
- Because you have many sheep, you must have built a “sheep pen” in the past;
- Therefore, even though you have “lost a sheep,” you still have a chance to “mend the pen”;
- Therefore, once the “pen” is mended, you can manage more sheep;
- Therefore, the loss of one or two sheep initially is negligible to the final outcome.
- So, what should the “leek” (retail investor) who has “lost a sheep” do? It’s simple:
- If you have money, slowly add to your position (buy more);
- If you don’t have enough money, desperately make money outside the market.
Controlling Position Size
You must always reserve a certain proportion or at least a certain amount of cash—this is non-negotiable, just like a diver needs an oxygen tank. As for what that proportion or amount should be, there is no fixed theorem; it is entirely up to your own judgment.
This viewpoint primarily emphasizes the necessity of controlling position size and holding cash. Here is the reasoning and logical analysis:
1. Cash Flexibility: Coping with Unknown Risks
In the investment market, risk is unavoidable, and market fluctuations can happen at any time. If you invest all your funds without keeping cash reserves, you may find yourself in a passive position when the market experiences a sharp decline or an emergency situation:
- Preventing Forced Selling: If the market suddenly drops, holding cash allows you to avoid being forced to sell assets at a low point.
- Handling Emergencies: Cash is the most liquid asset and can be used at any time to deal with sudden needs, whether it’s an urgent living expense or an investment opportunity.
2. Cash is the “Oxygen Tank”: Avoiding Full-Position Risk
- Comparing cash to an “oxygen tank” highlights its lifeline significance, especially during extreme market volatility:
- Buffering Effect: The market environment can be like a deep sea dive full of pressure; cash reserves provide you with breathing room during a crisis.
- Psychological Comfort: Holding a certain amount of cash gives you greater security during market fluctuations, reducing the possibility of making incorrect decisions out of panic.
3. Seizing Opportunities: “Ammunition” During Market Downturns
The market is cyclical, and opportunities for undervaluation always arise. If all your funds are invested without keeping cash, you might not be able to take advantage of opportunities when they appear:
- Buying on Dips: During market downturns, those with cash can buy quality assets at lower prices.
- Asset Appreciation Potential: This “ammunition” can help you achieve higher returns when the market recovers.
Excellent, Successful Traders Are Ultimately Risk Averse
- Watch other people taking risks! Sometimes the “correct conclusion” looks so sinister, even if it shines brightly in the deepest parts.
Extreme Fear of Missing Out
Fear of Missing Out, abbreviated as FOMO, is also known as Fear of Missing Opportunity.
FOMO, “Extreme Fear of Missing Opportunity.” FOMO is almost the most widespread phenomenon, and the more fundamental it is, the easier it is to be swayed by it. Just look at the slogans used by pyramid schemes or micro-businesses, and you’ll see they are almost always the same:
You missed XXX, and then you missed YYY, and now you want to miss ZZZ?!
The more lacking in opportunities a person is, the easier it is for them to be incited by such phrasing. Calm down and think about it: if you are not a person lacking opportunities, even if the price of Bitcoin skyrockets, will you feel anxious because of that fact? No! Because you have other opportunities.
Solitude is the Most Precious Quality of a Successful Trader
If you are not good at entertaining yourself, if you do not spend a large amount of time living life seriously, then you cannot reduce your trading frequency, and you will become like a leek staring at the screen all day, keeping your phone within reach even while having sex with your girlfriend—failure is inevitable.
Experts do not prioritize “correctness,” because anyone can be correct; it is not that difficult. The truly difficult thing is that you are not only correct, but you are uniquely correct. Only by being “unique and correct” can you generate massive trading value.