Its normal to doubt our strategy when the market is in panic mode and most make the mistake of going with the herd by either close all the positions, stop their strategy, try to adjust the rules or simple start looking for a better strategy as it is tempting to see all the profits being made by expert traders on social media.
Important point to understand is that there is no strategy that will work all the time in market. If one keeps system jumping based on market conditions it will never work, timing the market is very difficult. Hence one should stick to his tested strategy at all time and have the confidence that over a period of time the strategy will work out in his favour.
One may ask how to maintain confidence in our strategy and be sure that the edge is not lost? To have this confidence our strategy should be based on 3 key aspects:
1. Understanding the core reason as to why our strategy works, i.e what is the market anomaly we are exploiting. This will help us realise the favourable and unfavourable market conditions for our strategy.
2. Knowing what was the max historical DD for our strategy. This will help us know where our strategy is at current level.
3. Having an automatic clear MM & exit rule as the strategy approaches the Max historical DD.
I will explain this by taking my portfolio as an example,
1. My strategy is based on momentum in Growth stocks and those which are in long term uptrend. Hence it is very clear that my strategy will perform when the markets are going up and I should accept the fact that when the markets are down the strategy will perform badly.
2.If you observe it is currently at a DD of about 6% from the peak, this is not even close to the 2019 DD of 11% and the max 30% in 2008. So I have a long way to go.
3.As the markets continue to go down, there will be less and less growth stocks which will show upward momentum and hence there is an automatic scale out rule inbuilt into the strategy.
These above 3 points give me the confidence to stick with my strategy as I know that it will systematically take me out of the market when the situation arises. In the coming days I will try to post how I am managing my portfolio as the market dynamics changes.
As of now I am fully invested and there are 30 stocks in my portfolio. Also there are quite a few quality growth stocks which are still holding compared to peers. I plan to re-balance my portfolio on Monday by replacing few stocks with new stocks which are showing momentum in current market conditions. I will maintain full investment status for next week.
My portfolio status as of today:
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