œWhen you buy a share always assume you have made a mistake until the market tells you otherwise, and not the reverse?
80% of traders lose money in the share market!
So doesn™t it make sense to do the opposite of what the majority
are doing? Some of the best Traders in the World only get 50% of their trades right, in other words, they only make money 50% of the time. The difference is successful traders exit immediately when the evidence indicates they have got the trade wrong, and when in profit let the market signal when to get out and not their friends or emotions. After buying that share always assume you have made the wrong decision unless the market tells you otherwise, because the chances are you probably have ! It will be easier to sell and close that losing trade if you are prepared for the worst. or e.g. œI™ve made 100% profit on this share, I™m not greedy, I™m getting out. What this trader is actually saying is œI™m afraid of losing all my profits or if my friends find out I could have made 100% profit and it then went down they may say I was too greedy. These traders can™t wait to tell their colleagues how well they did recently, but they never talk about their losses. What we need is a œTrading System or a list of rules to follow and the discipline to act on them.
Entry Strategy Education & Experience (Which share to buy)
Trade Sizing Strategy Money Management (How many shares to buy)
Exit Strategy Risk Management (When to SELL - Minimize losses)
Profit taking Strategy (When to SELL - Protecting any Profits)
All 4 strategies of your Trading System must be in place before making that trade (Entry, Trade Sizing, Exit & Profit Taking), otherwise. EXAMPLE Trade 1. You have $20,000 to trade with so you buy 20,000 shares of XYZ Co. @ $1.00 / share. You have your exit price (stop loss) set so that if the share price drops 10% ( 90c ) you get out, and it does. Remaining Trading Capital $18,000. No Trade Sizing Strategy, minimize risk! Trade 2. Once bit, twice shy, œthey say, you are now a little more cautious and only buy 5,000 shares of ABC Co. @ $1.00 / share but it goes up to $1.30 (30%) you decide that's great profit,œI™m not greedy& sell.œHow can you lose taking a profit? œI™ve made $1,500 you tell your friends, this is great, you think, but you lost $2,000 on your first trade, your in fact down $500 to $19,500? No Trade Sizing Strategy! No one share should feel better or worse than the other, the share either fits all your Entry rules or it doesn™t, don™t get personal! No Profit Taking Strategy! Don™t let your emotions tell you when to Sell, the market and your Exit & Profit Taking strategy will do that, who knows how much higher it may have gone? After 10 or 20 trades this can get out of control & hard to manage! Let me demonstrate to you my simple Money / Risk Management System
Money & Risk Management are very important, if not the most important issues that must always be addressed by anyone seriously considering trading the Markets. They cater for the preservation of both your Initial & Accumulated Trading Capital. You may already have a brilliant trading system (rules what to buy) but if your method of Money Management is clumsy, you will lose money, unnecessarily! Once buying that share your role is no longer as a Trader but a Risk Manager. At some point in time your trading system will meet a draw down period (losing streak) and if you don™t know what to do, you will lose your feeling of control and try to desperately trade your way out of this crisis. Many people feel despondent and abandon a perfectly good trading system, or give up trading altogether with large profits still to be made. As a Trader, you™re destined to fail without proven Money / Risk Management rules. Managing the Capital in your trading account, controlling the risk it is exposed to, the size of each trade, together with entry/exit strategies are all pre-requisites of any Money/Risk Management System and successful trading.
Capital Management
The percent gain it takes to recover a loss increases geometrically with the loss. For example, if we lose 15% of our capital,we would have to make 17.6% gain on the balance to get even. However if we lose 30% of our capital, it will take 42.9% gain on the balance we have left to get even, and if we lose 50% of our capital, it will take 100% gain on the balance to get even.
A Money Management Strategy How much, how many & when!
1. How many shares on my first trade? Max. 20% of Trading Capital
2. How many open trades at any one time? Maximum 3 to 4 shares
3. When do I buy again? Once previous trade is Closed or Profitable
4. What is maximum $risk / trade - Max. 2% of Trading Capital
5. When do I exit profitable trade? When evidence indicates reversal
6. How many shares to buy on my next trade? Cumulative profit/loss %
Profit or Trailing Stop must never be below your Initial Stop Loss!
Protect Capital - Maximum Risk / Trade Initial Stop Loss =2% of Trading Capital e.g. $500 for $25,000 (less Brokerage fees x
2) e.g. Purchase 4,166 shares @ $1.20 & $1.093 is your Initial Stop Loss $500 less $58 brokerage / 4,166 shares = Max. Risk 10.7c / share
Protect your Profits Maintenance / Trailing / Profit Stop =a 7% &/ or 2ATR fall from highest Close since purchase is exit time. e.g. Close: $1.50 7% = Profit Stop $1.395
ATR - Average True Range - Welles Wilder Jnr. ATR is a Volatility Indicator & Metastock will calculate automatically. Volatility is the distance a share price moves over a nominated period. A True Range is then calculated by determining the maximum distance or range a price moves either today or from the previous day's Close to the extreme point (High or Low) reached during today's trading. Therefore the True Range is defined as the greatest of the following: The distance from today's High to today's Low or The distance from yesterday's Close to today's High or The distance from yesterday's Close to today's Low. (ATR) is the average of the True Range over a nominated period of time.
Why use Average True Range? Suppose the average daily range for a share is 20c (High - Low) for the past 6 months but due to interest, media, speculation or whatever reason this increases to 40c, 60c or more, if you use traditional technical stops such as support lines or moving average crossovers, you may exit the trade a little early or if the average daily range drops to 10c you may exit a little late. Just a little insurance against change in volatility
JBL Risk Manager V5.2 is now available and you will profit by using it by replacing emotional decisions with rules based on proven Money / Risk management strategies. Version 5.2 allows you to alter the parameters and caters for 30 trades before duplication with simple installation instructions. Order your copy today and take advantage of the current introductory price of $99AUD which includes the JBL Risk Manager V5.2, Smoothed ATR(
8) Indicator, Explorations & Multiple Moving Average Template from:
paritech.com.au/AU/products/software/jbl.asp. V5B is available to non Metastock users to calculate ATR value, if unavailable.
Disclaimer I offer no guarantee or warranty, nor do I accept responsibility, in any way, for the accuracy, reliability, timeliness o.completeness of any advice given above. Neither we, nor any of my employees, agents or representatives will be liable to any person for any loss or damage, arising as a result of any action taken on advice, information, or data read in this article. You must accept full responsibility for your own actions. This article has been produced for the general information of traders and investors, without any regard whatsoever for any individual person's needs or objectives. Indeed, the content of our site may not be appropriate for you! You should not act on any advice, information or data seen here, without first obtaining specific advice from your own adviser. Reliance on any such advice, information or data is at your own risk.
Joseph Barrington-Lew
paconsulting.net.au
