At Good Kids Trading, we're known for our math-based options and technical analysis strategies. But today, I want to talk about a different approach: speculation. Yes, you read that right - speculation!
What is Speculation?
Speculation is often misunderstood as a risky gamble. But I believe it can be a powerful tool to enhance your portfolio's performance. By definition, speculation involves investing in stocks, properties, or other ventures with the hope of gain, but with the risk of loss.
Why Speculate?
I've noticed a substantial impact on my trading success, here are 5 reasons:
1. Diversify Your Strategies
Too many traders think there is only one 'right' way to trade and often end up at one end of the spectrum. Some go 100% speculative, hoping to triple their account in 90 days, while others go 100% conservative, only taking trades with extremely high probabilities of profit to keep their capital safe. Finding a balance between these extremes is key.
2. Balance Your Trading Approach
The mistake many traders make is speculating with their entire account, turning the market into a casino. Instead, strategically align your portfolio so that 90% focuses on high-probability strategies and 10% on speculative trades. The younger you are, the better the case you can make for moving speculation to 25% or even 33% of your account.
3. Scratch the Itch
Let's face it, sometimes trading can feel mundane. Speculative trades add an element of excitement to your portfolio, keeping you engaged and motivated. They can also satisfy the desire for risk without turning your entire portfolio into a gamble.
4. Grow Your Speculation as Your Account Grows
Building capital is crucial to trading success. The more money you have, the easier it is to make money in the market. For those with smaller accounts, this might be frustrating, but it’s the truth. Keep saving and adding capital to your account. As your account size grows, so does your ability to take both conservative and speculative trades.
5. Rethink Risk
Don't fear risk entirely. Speculative trades can lead to remarkable wins, even if they come with a higher risk of loss. For risk-averse traders, I'm asking you to consider taking some speculative trades that have the potential to double, even if they may go to zero. These absolute zero plays are acceptable with a small part of your account.
I've had some remarkable wins buying shares of speculative companies. Although I don't normally post these trades to the community I thought it's important to bring it up in this week's blog.
2 Speculative Success Stories
Salesforce (CRM)
I've speculated for decades. I made money with a then-unknown company called Salesforce back in the early 2000s. I saw an ad in a technology trade magazine and decided to invest. The company was advertising to CEOs of Fortune 500 companies. I assumed if one company adopted their software, others would follow. This speculative strategy worked well for me. Sure, plenty of my speculative trades didn’t pay off. When you allocate only a small part of your account to speculation, it adds excitement and balances your risk profile.
2. Moderna (MRNA)
One of my favorite speculative plays was investing in shares of Moderna in 2019. I bought shares at $22 and sold half when the stock doubled to $44, recouping my investment and playing with house money. I then sold covered calls on my remaining shares, generating cash flow while letting the stock appreciate. Eventually, I rode the shares up to $355 before getting called away. Could I have held on longer? Maybe, but the key is having a plan to take profits and manage risk.
The point of sharing my trades aren't to brag but to illustrate the importance of speculative trades and having exit plans. Don't sell ALL your shares for a 50% gain when you can aim for a 300+% return. Speculative trades provide significant profits if you let them run and have a strategy to lock in gains.
Ready to Add Some Speculation to Your Trading?
Two simple strategies to speculate:
1. Buying Shares
Buying shares of a company is a great speculative play because shares are like assets and they never expire. Even if you start with a few hundred dollars, as your account grows, your ability to take on more speculative trades will also grow. Depending on your account size you don't have to buy it all at once consider using our Pyramid strategy.
2. Buying Calls
Buying calls is another way to speculate, but calls expire. Next week, I'll discuss how I decide when to buy options and give you several guidelines to think through as you decide on shares versus calls next week. Stay tuned and subscribe to get the notification.
Start small, manage your risk, and watch how speculative trades can complement your conservative strategies.
Happy Trading Good Kids!
$Maxwell
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