Trading by Target Position: A Process for Managing Exposure and Losses
Summary
This article frames trading as the management of positions rather than a sequence of individually realized trades. Buying and selling exchange cash for assets; profit and loss arise as the value of the held exposure changes. The practical process is to review current holdings, compare them with desired holdings, and trade when the difference is large enough to justify the costs. Under this view, an unrealized loss is already an economic loss, and past entry prices do not by themselves justify continuing to hold an asset.
The guidance is intended to counter loss aversion and the tendency to keep unwanted positions in hopes of recovering losses. It allows that switching costs can matter, particularly for illiquid assets, and says to weigh those costs against the expected return of alternatives. The article offers a conceptual decision framework rather than a quantitative signal or empirical test; it does not specify how to estimate desired positions or expected returns. Its central implication is to evaluate holdings using current prospects and portfolio needs.
Key ideas
- Portfolio profit and loss comes from changes in the value of held positions, apart from transaction costs.
- A trader can compare actual holdings with desired exposures and adjust when the difference justifies trading costs.
- An unrealized decline in asset value is still an economic loss, even before the position is sold.
- Past purchase prices alone are not a reason to retain an unwanted position.
- Illiquidity and switching costs can affect whether and when a position should be changed.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.