When I was stationed as an intelligence analyst in Iraq 12 years ago, my main priority was managing risk.After all, being an intelligence analyst meant my job was to assess rumors. And we faced significant threats. Any mistake carried deadly consequences.So when I heard the whispers about our kitchen staff, my first thought was to fire them all…See, it’s common practice for the Army to hire local civilians to work in the “chow hall.” The Army does this everywhere it goes.And on my base, there was talk about the workers. Dishwashers with ties to shadowy organizations. Cooks trying to learn our patrol routes. Things like that.Investigating these rumors was impossible. We didn’t have access to an FBI database of arrests, and local police didn’t maintain files of suspected gang members.
Naturally, I wanted to eliminate the threat. But a more seasoned analyst showed me I was wrong…
As he walked me through the chow hall, he explained our two choices.One, we could eliminate the positions. We’d be safer — but the work would still need to be done.So Army personnel would have to pick up the slack. That would mean longer days, and tired troops would face greater risks on patrols.Or two, we could manage the risks. Most cooks and dishwashers weren’t trying to learn our patrol routes. And since we couldn’t figure out who the spies were, we simply had to prevent everyone from accessing important information.I realized he was right. From that point on, I assumed every rumor was true and just managed the risks. It was the safest approach.Managing risk was the most important part of my job. And it still is today.
Manage Risk With “Defense in Depth”
When it comes to trading, managing risk is key to success.But there’s no single way to do it effectively. It requires the same approach I used in the military — “defense in depth.”To start, I follow a systemic approach. I have back-tested rules in place to decide what to buy. This helps me avoid snap judgements.I also focus on short-term trades. In the long run, anything can happen. The short term is more predictable. Before I enter a trade, I plan the exit. I know when I will sell. Not the specific day or price, of course — I just know that I’ll sell when certain market conditions change.I also only risk a small amount of my portfolio on any trade. That way if the trade doesn’t work, the loss is small.Lastly, I diversify. But not in the traditional “put your eggs in different baskets” way…I trade a few different strategies. Not all strategies do well all the time. Having different ones at hand increases my probability of success.Following these rules helps me avoid stocks that are going down. With this process, I avoided the most recent tech wreck AND the big decline in crypto.Take bitcoin, for example. My volatility indicator, which you can read about here, told me to get out of BTC in December 2021. The sell signal came when the indicator crossed above its moving average (the thin blue line).
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Now, crypto is a market with a lot of hype. Many traders were calling to “buy the dip” in bitcoin back in December. But following my rules saved me from a crash of over 50%.And it’s helping me navigate the current market, too.I see dozens of stocks that are down 80% or more. Some are big names. Many traders are buying, because they think these stocks are bargains. And there’s always speculation that these names will bounce back.That’s not a good reason to buy. The only good reason to buy, in my opinion, is a signal from my rules.Just like in the Army, I ignore rumors. I understand everything is a risk. And I do all I can to limit it.
Regards,
Chart of the Day:Relief at the Pump in Sight?
By Mike Merson, Managing Editor, True Options Masters
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Oil prices are dumping hard this month.WTI Crude Oil is down over 16% from just two weeks ago, once again dipping below the long-term resistance/support line.We’ve seen oil take a few trips below this line so far in 2022. Invariably, it’s always bounced back and left a long wick behind — a sign of huge buying interest.To know where oil is headed next, watch the blue line above. That’s the next key level of support. So long as we don’t break that, I’ll consider oil in an uptrend.But on a definitive close below that level, it would sure look like the trend has changed. And since oil prices tend to lead news, I would bet on a continued slide in crude oil if we see prices close at these levels.Whether that translates to lower prices at the pump is anyone’s guess. As we’ve seen, gasoline isn’t the perfect analog to oil prices. But with $5 gas finally making its way here to the Sunshine State, I certainly hope it does.
Regards,
