In trading, the quest for ‘alpha’ – the ability to beat the market and achieve superior returns – often boils down to a strategic choice: aiming for consistent, smaller gains (“hitting singles”) or seeking large, high-risk profits (“hitting home runs”). This blog post delves into these approaches and discusses a counter-intuitive hidden secret that can lead to sustainable alpha in trading.
Hitting Singles: The Consistent Alpha Approach
Steady Alpha Growth: Hitting singles focuses on achieving consistent, smaller profits above market averages, contributing to a steady alpha growth over time.
Risk Management: With lower risk per trade, this approach aligns with maintaining alpha in volatile or unpredictable market conditions.
Compounding Alpha: Small, regular gains can compound, significantly boosting alpha in the long term.
Psychological Benefits: This less stressful approach allows traders to maintain a level-headed strategy, essential for consistent alpha generation.
Hitting Home Runs: The High-Alpha Strategy
Large Alpha Gains: Targeting home runs can yield substantial profits, significantly above market performance, in a short time.
Capitalizing on Market Opportunities: This approach can be highly rewarding during strong market uptrends or when specific sectors exhibit high growth potential.
Skill and Timing for Alpha: It requires a nuanced understanding of market dynamics and excellent timing, critical for achieving high alpha.
The Drawbacks of Each Strategy
Singles Approach: The growth in alpha is slower, and traders may leave “some meat on the bones.”
Home run Approach: The higher risk can manifest large gains, with significant swings in portfolio performance. Or it can lead to near certain demise over the long-haul.
Which Strategy is Likely to Get You the Furthest in the Long Run?
Everyone imagines being a “home-run hitter.” But not unlike real home-run hitters, strikeouts tend to come steady and strong. Sure, you could connect in a big way early on when “swinging for the fences,” but more often than not, swinging for the fences ends in certain demise over the long haul.
In his book, Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders, author Curtis Faith explores the journey of several newbie traders who were taught to just hit singles. And in the end, they achieved extraordinary results!
So, leave the home-run swing to the Yankees. When trading, go for consistent singles and significantly increase your chances of success.