Friday, November 07, 2008

Overcoming the Pitfalls of Investing

The biggest problem in developing trading strategies is that few returns can wipe a portfolio through the trading strategy on average would make positive gains. There are many lines of thoughts on how to overcome these, which are as follows:
• These unexpected events are outliers and can be ignored – this would result in blown up traders
• Try to profit from the rare (Black Swan) type of events – as advocated by Nassim Nicolas Taleb
• Hedge away the possibility or the exposure to these rare events – may end up becoming un profitable due to hedging cost
• Use only strategies which have positive exposures to rare events while the expected value of the trading strategy is also positive

The latter is like card count at a Black Jack table! The money just keeps flowing.

Suminda Sirinath Salpitikorala Dharmasena

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(c) Suminda Sirinath Salpitikorala Dharmasena. All rights reserved.

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