Thank you for joining us here at Wolf on Wall Street. I want to share with you some ideas and concepts that have stood the test of time and proven to be a formula for success.
First about the Trade List at W.O.W.S., you can find it under "Trade Ideas/Stock Lists" on the right sidebar and usually the top link will say something like "latest trades" or "most recent list", click on that and in the article window a spread sheet will open, scroll down to the bottom, and those are the latest trade ideas color coded by date. If the Date is March 15th, these are trades for execution on the morning of March 16th. We execute all trades at market on the open, unless there is a limit order mentioned in the notes section for each trade to the right on the spreadsheet-it is important you read these notes.
The stops I put on the list are suggestions, but feel free to adjust them to your own needs. I try to offer you the most probable and timely trades that the market is offering. "That the market is offering" is important because there is no one particular tactic taken here, I adjust trading styles to meet market conditions. If we are near the end of a rally, then you'll see "the cats and dogs" trades which are cheap stocks under $5 that tend to see big 1-2 day moves. We see this occur just before a major bull move reverses. When the market is beginning to trend, you'll see trending trades, sometimes position or swing trades,long or short trades, stocks, ETFs or commodity based positions, it just depends on what is working in the market at that time. I try to make clear what that is in my posts and notes.
Now as to success and building wealth. I use a lot of custom indicators because I believe to make money in the market is to see what others have missed, however there is no indicator that will make you more money then a good risk management plan.
Here is what I suggest. You can take the aggressive approach and limit each trade to a target loss of 2% of portfolio if all goes wrong-this can not account for gaps and for this reason I suggest never putting more then 15% of portfolio equity into any one trade or any number of trades that are highly correlated.
The 2% Rule is simple, you have a $100,000 portfolio, 2% risk money =$2,000. That is the max. you will lose under this plan-not accounting for gaps. So if a trade is bought at $5.00 and the stop is $4, you have $1 of risk per share. Divide $2,000 (your 2%) by $1 (risk) and you can buy 2000 shares. 2000 x $5.00=$10,000 and is below our 15% maximum investment of portfolio-$15,000 and you are fine. This is an aggressive approach to risk management.
A less aggressive approach is to decide how many positions you are comfortable having open at any point in time. Lets assume it is 8, so you divide your $100,000 portfolio by 8 and get $15,000 (which works out perfect for our 15% rule). You then figure out 2% of $15,000 (risk per position) and you get $300 risk money. Our same example trade, $5 entry and $4 stop with risk of $1 per share is used to divide the $300 and you get 300 shares or $1500 which is significantly less then our position limit of $15,000, unless you adjust your stop to say $.25 rather then a dollar, then you get 1200 x $5=$6,000 position size-still below. It would take a stop at $4.90 (which may or may not be a good stop level, depending on the trade) to take full advantage of the position size limit ($300 / $.10 risk=3000 shares x $5=$15,000). This method of deploying the 2% rule is less aggressive and better suited to those that like to diversify with more then a few positions.
On diversification, I DO NOT like to overly diversify. A $100,000 portfolio for me should have 8 positions. This allows you to get into enough long/shorts and different sectors. Higher limit portfolios I'd add a little more, but probably never much more then 12 "core positions" not including the crazy money trades that are very small. Over-diversification kills returns.
At the same time, I offer a lot of trades certain nights and people can't choose, they feel overwhelmed and wish I just put 1 or 2, but think of it like this-"look at the trades that your portfolio doesn't have industry exposure to only and chose from those". Having 6 positions and 3 of them closely correlated is not good risk management, you have half of your portfolio in basically one position.
Finally, pull the trigger. If you are practicing risk management and you are FOLLOWING THROUGH meaning stopping out (always on the close unless your position is melting down), then you have nothing to fear, get in there and trade, but do not falter on your risk management, if you have to stop out, then do it; you can always get back in.
Quickly on stops-chose them when you are objective and the time when you are most objective is before you enter the trade. Do not make them too tight for an initial position, and never move them unless you are moving them in the direction of a successful trade.
If you have questions, email me any time. Thanks for joining us.
Brandt@Trade-Guild.net
5 years ago
