| Trade Selector's Trading Methodology - Overview |
Swing trading with stops minimises losses
- Our swing style of trading is to actively manage open positions by moving stops as you would if you where day trading, by protecting gains along the way. We believe the best way to beat the market is to keep our losses small and to stay in a trade until our stops take us out.
Over short time frames
- Our stock selections are ready to move immediately after posting so we expect a quick move in our direction (within 3 days). We rarely stay in a trade longer than two weeks.
With low maintenance
- We post our entry and stop prices so you don't have to sit in front of your screen and watch the market all day. You can simply follow our trades and place limit orders with your broker at the trigger price, check in the evening and set additional buy limit orders and stop loss orders on positions that were filled during the day.
Good Money Management
- Good money management is the key to your success, Do not underestimate its importance. The first and most important rule is NEVER put all of your money in one position. We believe holding 5 positions in a portfolio is the right balance. Rule number two is always set stops. There are two additional simple and proven ways of managing your trading capital.
1). Limit the dollar amount you invest in each position. Simply divide your capital by 5 or what ever number of positions you are comfortable holding. This is the total dollar amount you will invest in any position.
2). Limit the dollar amount of the total portfolio you put at risk.
How to determine the size of your position based on the dollar amount you are willing to put at risk?
- Position size based on a 2% stop loss
First you need to determine how much of your trading capital you are willing to put at risk. In our trading plan we never want to risk more than 2% of our total equity.
Assume you have a $30,000 account, 2% of $30,000 is $600. So, if the stop is hit, the position size needs to be such that the total loss is no greater than $600.
Example: You have a $20 stock, and you have a $30,000 account, here is how you can determine how many shares you should trade of this particular security.
First figure out your stop-loss point (we do this for you on our weekly selections). Let’s assume that the stop-loss is at $19. To figure out the number of shares you can purchase, simply divide the amount you are willing to risk ($600) by the amount of points your stop-loss is from your entry price. The entry price is $20 and the stop loss is $19, so the difference between the two is $1. Now divide $600 by $1 = 600 shares. That would give you a total investment of $12,000. The 600 shares times $20.00 ea. = $12,000.
You can buy 600 shares, if you get stopped out at $19, your loss will be no more than 2% of your total portfolio value.
Based on our trading plan, we want to divide our capital in to 5 positions so if the cost of 600 shares is more than our allocation for 1 position, we can only buy the number of shares allowed by our allocation. Based on a $30,000 portfolio $30,000 divided by 5 = $6,000. So instead of 600 shares you can only buy 300 shares. Take $6,000 divided by $20 = 300 shares. This will protect you from putting all your eggs in one basket and will also reduce your maximum loss potential.
We want to use the magic of compounding in our trading plan, which means that, we will progressively increase or decrease our position size based on the new dollar amount of our total capital.
By progressively raising or lowering each new trade, we automatically increase our gains and reduce our losses
Why use targets if we are trailing stops?
We have been asked and maybe you have also wondered why we use targets if we are trailing our stops or booking gains before reaching the target price. The simple answer is, targets are simply that - 'a target', or a better definition would be 'the next resistance/support area where price is most likely to turn around'. The reason we set a target is to determine if a selection offers a good risk to reward ratio. In other words we compare the target price to the initial stop price to make sure the potential profit is greater than the potential loss.
We determine our stop price and if it is -3% we want to make sure our profit target price is at least 5% and preferably more. We always want a minimum 1 -1.5 or better ratio or we pass on the selection. One of the biggest mistakes new traders make is jumping on stocks that look like they are going to move in a particular direction with out checking what the potential risk/reward ratio is.
Here's an example:
- If you are looking at a stock that is at $20.00 and it looks great, all of your analysis is telling you that it is going to go up and you determine your stop is at $19.40 or -3% but if the potential resistance area is at $20.60 you will be risking a -3% loss for a 3% gain.
- If you take two losses in a row you are down -6% and now you need at least two winning trades just to break even. If you happen to win three in a row you are up 3% but you risked 9%.
- Now if you lose that 4th trade you are back to break even and starting all over again. However if you only enter selections were your risk/reward is 1 - 1.5 and you can take the same two losses in a row a -6% then if you have two winners at 5% each you are up 4% and if you have that third winner you are up 9%.
- Now, if you lose that 4th trade you are still up 5% and you risked the exact same amount.
So the long answer is, a target is not the price you are planning on selling the position at, it is what determines if a selection is worth risking your money on. We hope this helps both our potential subscribers and our members better understand our risk profiling and selection methodology.
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