First of all, I would like to clarify on the use of some terminology here. Though I use the word “trade” quite often, probably due to personal elaborate use of Technical Analysis in my work, I always keep a long-term view on things. I pay attention to a wide spectrum of technical data and strive to take full advantage of the up-down and swinging behaviour in prices that I can understand and, hence, anticipate effectively to earn myself a low-risk position that I will then hold for as long as I can -- let the profit run. There’s no Holly Grail for predicting the future. The best you can do is, as Warren Buffett often puts it, looking at simple cause and effect that you can understand.
"The business schools reward difficult complex
behavior more than simple behavior, but simple
behavior is more effective." -- Warren Buffett
One must possess a long-term view in order to achieve bigger successes in financial markets. There are always conflicting information and news that will disturb our conviction on a particular trading/investing decision. Without a long-term view and ability to think independently, instead of blindly listening to politicians/regulators who lie to us, journalists who are no different to a bunch of herds, or mainstream economists who are often the dumbest money managers in the world, we will not be able to withstand the emotional upheaval caused by their "noises".
Personally, I believe how much capital you need depends on 2 major factors:
- Your time horizon. This being how long you wish to commit yourself to a investing/trading decision you made. If you buy into the thinking that Natural Gas will outperform Crude Oil in the years to come before reaching 16.0 -- you can buy now. If you think China *will* become the 2nd biggest economy after the US in the next 50 years -- you can long the major Chinese equity indices now. Buffett is a long-term bull with what he calls a “fantastic business”. He believes a fantastic business will weather the storms of recessions and recessions. He has held on to his stake in Coca-Cola for decades, over several major recessions in the US.
- Your stop. This is very important in whatever investing/trading decision one makes. One must accept that losses are an intrinsic part of the game and no-one in financial markets can avoid them. This is a threshold you can afford to withstand before accepting your failure and walking away with a *pre-calculated* loss. Buffett shorted the US dollar big time years ago. But he was slightly too early to make that commitment and he was suffering a nearly $10 billion of unrealised loss, if I am not mistaken, at that time until he cut down the size of his bet.
Take Natural Gas as an example. Each Natural Gas futures contract is highly leveraged. A mere 0.1 point move in price means a gain/loss of $1,000 per contract. (You can imagine the kind of daily fluctuation I am experiencing with my position.) One futures contract requires an initial margin of $6,750. If your line in the sand is at 7.0, and the price is now, say, about 7.6, you are talking about a threshold of (7.6 – 7.0) / 0.1 * $1,000 = $6,000 per contract. Such a threshold will have to make sense with your target of 16.0, which will give you a reward of (16.0 – 7.6) / 0.1 * $1,000 = $84,000 per contract.
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