Share Market Investing kept simple!
œWhen you buy a share always assume you
have made a mistake until the market
indicates otherwise, and not the reverse?
Hello and welcome! My name is Joseph Barrington-Lew and after more than 10 years of helping
frustrated beginners and experienced traders understand the importance of correct Money & Risk Management principles and why they should use them, I felt there had to be an easier way to benefit from these basic principles used by successful investors & traders. Feedback from friends and colleagues found books on the subject too difficult to follow or put into practice and this still is the case, in my opinion. After a few more years of study, listening to and having long discussions with many traders and many bottles of red later J JBL Risk Manager was launched, currently available thru Paritech. Since its release in 2000 it has helped many traders around the world limit their losses, protect their profits and monitor their trading performance by automatically calculating these numbers. O.commercial over, now for proven strategies that do work! The following information will be of interest to a novice beginner or experienced share trader or investor.
Assume you are wrong? 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 (fear of loss/ego). 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™ll be easier to sell and close that losing trade if you feel you™ve made the wrong decision in the first place. or e.g. œI™ve made 100% profit on this share, I™m not greedy, and I™m getting out. What this trader is actually saying is œI™m afraid of losing all my profits or if my colleagues find out I could have made 100% profit and it then went down they may say I was too greedy. These inexperienced traders can™t wait to tell their colleagues how well they did recently, but they never talk about their losses unless they chose to give up on the market and invest in Real Estate. There is nothing wrong with Real Estate for Capital Growth but the Share Market can give you cash flow. What we need is a œTrading System or a list of rules to follow and the discipline to act on them. In fact there are 2 major reasons why so many fail in the share market. Firstly it's because they have no idea about the correct rules for Money or Risk Management and the second is it is too hard for them to sell when they are losing money and having to admit they were wrong.
Requirements of a Trading System ¢ Entry Strategy Education & Experience
¢ Trade Sizing Strategy Money Management How many shares to BUY
¢ Exit Strategy Risk Management Minimize Loss with a Stop Loss Price Level & SELL
¢ Profit Taking Strategy Protecting Profits on the way up, when do I SELL
All or nothing? All 4 strategies of your Trading System (Rules) 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, I™m not greedy& sell. How 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 Profit Taking exit 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!
Money & Risk Management is very important, if not the most important issue that must be addressed by anyone seriously considering trading the Markets and being successful by making a Profit. M & R M preserve both your Initial & Accumulated Trading Capital. You may already have a great system or set of rules to determine what to buy but if your method of Money Risk Management is clumsy, you will lose money, needlessly! Once a share is purchased 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 desperately to trade your way out of this crisis but too 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 a proven Money / Risk Management strategy or rules. Managing the Capital in your 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 or investing.
Recovery? 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 a 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. If you begin talking to you.computer telling the share price to go up a little higher then you™ll sell it's time to sell your shares and take a break.
A habit I got into for several years which made sure I followed my trading rules and not sway was to set a particular day each month to determine the profit that was made the previous month, say the 10th. I would transfer from my trading account to my cheque account 10% of the profit made and blow it, takes friends out to dinner, buy a new suit or outfit, enjoy it. Sub-consciously you will follow the rules every month because you know you™ll be rewarded for doing so. It helps prevent you bending the rules. Because I recommend not having all your money in the share market but a fixed percentage in cash this may work for those that tend to bend the rules constantly.
Over the years I have found woman to be better traders than men only because when they have a plan or strategy that works they generally don™t change it where men find something that works and try and improve on it. There is no Holy Grail for trading!
A Money Management Strategy How much, how many & when?
¢ 1. How many shares do I buy on my first trade Max. 20% of Trading Capital e.g. A Trading Capital of $25,000 is $5,000 worth of shares per trade
¢ 2. How many open trades at any one time maximum 3 to 4 shares (based on $25K)
¢ 3. When do I buy another share Once my previous trade is Closed or Profitable
¢ 4. What is my maximum $risk / trade - =Max. 2% of Trading Capital (Stop Loss) Selling points or price level to protect your Capital Protect your 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 and $1.093 is your Initial Stop Loss $500 less $58 brokerage / 4,166 shares = Max. Risk 10.7c / share ¢ 5. When do I exit a profitable trade When the evidence indicates a reversal Selling points or price level to protect your Profits Profit or Trailing Stop must never be below your initial Stop Loss! Protect your Profits = Maintenance / Trailing / Profit Stop =a 7% and/ or 2ATR fall from highest Close since purchase is time to exit. e.g. Highest Close: $1.50 7% = Profit Stop of $1.395 n.b. 7% used for stocks valued between $1 - $2.50 (ATR Average True Range is an excellent volatility indicator for those with access) ¢ 6. How many shares do I purchase on my next trade Max. 20% of Trading Capital As per first trade except it is 20% of current Trading Capital if all exits hit.
So, keep it simple, follow your rules and good trading or investing. Nearly 5 years ago I wrote a program that calculated all these parameters for you. You will require a charting package, historical data, update facility via the Internet and simple instructions on how to use it all. For recipients of Perth Woman I have negotiated a very attractive package for those that are interested, simply click on this link and fax your details for prompt delivery. Any questions please email
E-mail joseph>
E-mail joseph Further info re JBL Risk Manager at
paritech.com.au/AU/products/software/jbl.asp Joseph Barrington-Lew
p.s. The difference between a Trader and an Investor is your tax liability. As an Investor you do not pay tax until such time as you sell. Ensure you have .competent accountant with previous experience with other clients who are traders/investors. If you declare to the tax office you are a trader all gains and losses are taxed as income where Investors if they make a gain claim as Capital Gains and pay 50% of the appropriate tax bracket they are in. There are also tax deductions applicable but please confirm all this with your accountant.
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
