This subject is so...subjective that it sometimes is hard to fit all styles into one kind of methodology. So, since I am not a buy and hold guy or a daytrader, I will elaborate on how I hold my stocks. This is in know way the way you should trade. I recommend on holding more than a couple of stocks but to go the extent that I go in "bull" markets should not be done unless you really know what YOU are doing.
The best method I know for holding the right amount of stocks for your personal cash criteria can be found in "How To Make Money in Stocks" by William J. O Neil. You can also find many money management articles in the Investors Business Daily Learning Center found at investors.com.
For my personal style I dont like to hold any stock that makes up more than 5% of my account. That doesnt mean that it cant grow to more than 5% but no matter what I never buy more than that. The reason being is that I have found that whenever I think I have found a big winner, in the past, and have loaded up on them it has never done what I thought it would do. This is just bad luck on my part. I dont seem to be able to outperform the markets by hitting the right MSFT DELL EBAY CSCO BOOM FORD TASR TZOO for a short time frame huge return. So after a lot of trial and error, I have found by buying all the great stocks that breakout from great bases I am able to outperform as long as I have great sell rules to limit damages. Along with that, knowing how to average out of buys can keep me in some big winners like NDAQ BMD ASF this year alone. By averaging out of my winners and cutting my losses quickly it allows me to always have some cash on hand ready to buy the next potential big winner breaking out of a base.
The great thing about this method is how well it can alert you to swings in the market. When the market is in an uptrend and all the sudden I start getting a lot of different sell signals in the longs I have, I know the tides are changing. On the other hand, when we have been in a bear market and I have a lot of cash on hand and all of a sudden stocks start breaking out of great bases on high volume while the market gets choppy trying to find a bottom, I know that a bull market is starting.
The more stocks you hold the more money you need to have. You dont want to own 50 stocks and have only $5,000 in your account. You need $25k at least to hold 50 stocks. That would give you $500 in each stock. That may not sound like a lot but if you trade on a per share basis it is as cheap as can be.
Now, the next thing we need to bring up is those 50 stocks you hold. If you are buying at the wrong time all the time, this method will ruin you fast. But if you have a track record of hitting at least .333 in the stock market, this method will work if your winners are larger by your losers at a 3 to 1 ratio. That is why IBD always says (and newbies YOU ALWAYS SHOULD) cut your losses at 7%. I cant stress that enough. Why? Because normally when I get a stock right a 20% is average. I can get 3 wrong to every 1 right and come out on top. Just like baseball hitters. The good thing about the method and stocks I select has become the fact that I now swing over .600 in bull markets and over .400 in any other kind of market. This ratio, over time, allows me to well outperform any mutual fund over a 3, 5, and 10 year period.
To learn how I find stocks to then employ this kind of management, please read the post called "How I Scan For My Stocks."
There is much more than this that goes into the overall money/position management game. I just thought this would be a great overall place to start. I will reread what I have posted and in the future will add suplements to this post when I feel neccessary.
All questions and comments are welcome. Don't be shy!
13 comments:
What type of stops do you like to use? One's based on Support/Resistance or more of an ATR Volatility based stop?
If after having a 20% or more gain a stock moves lower on HUGE volume, there is a sell. If the stock breaks below the 50 dma after riding above it for a long time, there is a sell. If the stock has gone up 30% in the last four months, and now all of a sudden it goes up 30% in two days, there is a sell. If the stock breaks out of a base and then reverses the next day on heavy volume, there is a sell.
There is absolutely NO hard stops on the books, when I trade. I have been gunned down, intraday, way too often.
A couple of questions:
1) O'Neill endorses the idea of "averaging up" when you find a winning stock. Do you do this at all? As a new investor, I am struggling with the idea of selling some stock when I get a 10-20% gain to lock some profits in but then also adding more as it hits new buy points. It seems a little contradictory and hard to decide which technique is best? I guess some of it probably depends on the state of the market as well, right? I was curious of your thoughts on this topic.
2) Looking over my watchlist, I was curious of your thoughts of ENDP, RITA, and VIP.
I do enjoy reading your blog and have learned a lot. Thanks for your work.
keep up the good works, im learning alot from your daily articles
I never average up.
It is always hard at first to sell on the way up. There is no way to be able to do it without actually "doing it" first. Only after watching your hard earned gains go away by not selling into climax runs or big run ups will you be able to do that.
And you wouldnt buy more as you are selling. He is refering to buying the stock after it completes a second or third base or it hits its moving averages. No stock is going to climax run to its 50 dma. We are dealing with stocks trading over these averages. You just have your time frames confused. It takes time to understand it.
It does, also, depend on state of market. In bull market you would let stocks run more. In bear markets, if selling arrives I bail. I dont average out.
I like all of them. But none are a buy at this point. All also show flaws with their bases. But in a bull market a rising tide lifts all boats. Especially if the boats have good earnings and sales growth.
Thank you very much for your comments.
Thank you Vince for your kind words. I am really glad I am helping you learn something about trading stocks.
Why dont you write up a mini book? and publish it?
I am only 26 yrs. old. I am not nearly old enough to write or complete a book. As far as I am concerned, I am just beginning my journey in the stock market.
I also do not have the interest right now. One day, I know I will. But for now I know I can trade stocks and that is good enough. I will never forget how to trade so I know I have a lot of time left.
Right now I have decided I want to enjoy my young years in Maui surfing and living in paradise (before it is an island full of timeshares and hotels). It isn't going to always look like this. I know it isn't as exciting or carreer building as Las Vegas or New York City would be but this is the most beautiful place in the world to live. There is no other place like Hawaii. And in my lifetime there never will be another one like it. I have no interest in changing anything, for now. Unless I was offered a lot of money. Then I might change my mind.
Hi Josh
Thanks for the "Position Management" column today. Look forward for the next ones to be added to this one. Concerning size of trades (it is not my case) but one could have a problem contrary to the one described where liquidity comes into play if you have a large account as "up to 5% of your account" can mean a lot of shares; so you are restricted only to high volume stocks or you have to have lots of different stocks in your account. For stops (trailing) currently I use a small software TCScan+ that gives me levels for my positions and is ATR based. I usually keep 1 Std deviation at the beginning (always within 7-8%) in a market like this, then tighten the stops as profits grow or I think the market is about to change and bring stops to the standard level. Do you know of or use this software at all?
As usual comments appreciated.
Regards
I worked my way through the IBD100 and some other lists on investors.com this weekend and I've shortlisted some stocks. I'd be interested to hear your view on OIS, CHL, CTRN (35 pivot), INT (37.50 pvt) and KG (tight flat base).
Lets hope this learning centre is helping me and you can see an improvement in the stocks!
Aloha Luca
If I am following your statement correctly, you are implying that 5% would be difficult to manage. That is correct. Notice, how I said this is my style after 10 yrs. I did not get to where I figured out how many stocks I could hold to maximize my gains while lowering my losses until my 8th year of trading on my own.
I recommend the IBD method period. I dont think there is a better way to trade, for newbies, than the IBD way. It is the smart way to start investing.
Also, using my method you can hold stocks of all size: small, mid, and large cap. There is no restriction. But, by nature, stocks that trade under 100k shares are more volatile if they have a small float.
If I got the comment misinterpreted, I apologize.
Also, I have not heard of that software. I would love to see a link and check it out. But, remember, I dont have hard stops.
Charts are art and science. If a stock is down 10% after an uptrend of 300% it isnt neccessarily a sell. Why? Lets say after going up 300%, the stock drops on hard volume through the 50 dma intraday and falls intraday as much as 25%. But before the end of the bell it closes above the 50 dma and instead of closing down 25% it closes in its upper intraday range and is down only 10%. That is accumulation and is in NO way a sell. That is support. You should have sold and locked in some profits if you had a 300% gain anyway, before running into this situation. If you have not, you are greedy.
Great Luck, LUCA
OIS is a mess. Crazy wild chart. Buy point is a break of Aug/Sept high but this chart is ugly, even though it is moving up. Look at all the high volume down days in the base past two months. UGLY
CHL broke out of its cup with handle base in Apr/May. That was the original buy. It is a nice chart but once again look at the most recent base. There is plenty of down days on heavier volume. The rebuy was when it touched the 50 dma.
CTRN broke out of its 3 month cup base in early November. That gap up on volume was the buy day. The recent pullback on 11/16 was the rebuy as it pulled back to the pivot.
INT clear breakout from first base was in May 2003. Since then it has made 4 bases and now is probably done. It could probably go up further from here, but the base is so choppy and ugly and volatile who would want to own it unless you are holding very long term. UGLY and volatile chart.
KG chart is another "too late" stock. It broke out in August from a clear flat tight base. But that buy was sketchy. I just knew from the pattern it had gains. But this is not a stock anyone should have bought if they follow the IBD method. It broke out again in November but looked what happened right afterward. Still a hold but this chart is not pretty anymore. A further breakout to new highs would be a buy though, as long as volume is there.
My great friend, Worldcom, you know how to pick solid stocks but you are too late on all of them. You want the charts to look like BMD, TRAD, TSCM, RNOW, BNT, CRDN, ASF, GES, SBAC, and ANAD before there most recent breakouts. Look at all weekly charts and look at daily charts that go back 2 yrs at least.
CWTR dropped almost 5% today on an increase of 70% volume. Is this a sign to sell? Or is this just people selling their quick gains?
Make sure you always look at the big picture. If you look at a weekly you wouldnt evevn know today happened. You can sell a little if you are scared but this is normal profit taking. Look at volume of breakout compared to today. That's normal. If it closes that gap on heavy volume then you have real concern. Until then you are letting the noise interfere with the nice longer term chart pattern.
Great luck in your trading. Also realize we are very overbought right here. Extremely overbought. We are bound to run into profit taking.
1966-1982. Study that market to learn how to trade this one. 16 years of sideways action has only had 5 yrs. worked off of it, if history is repeating itself.
Post a Comment