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Sunday, October 26, 2003
Good evening friends,
The markets took a tumble at the open on Friday and kept going taking all the scared money with it as the NASDAQ retreated down to the trend line and the 50 DMA I spoke about in the last chart I showed of the NASDAQ last week. Then, in the last 40 minutes or so on Friday, the markets had a reversal and bounced back and closed above these crucial areas of support. The close was very good but we are not out of the woods just yet. We need to hold this level on the NASDAQ or we could be in for some more serious selling. This one is a tough call and I'm inclined to think we bounce from here and rally up but I wouldn't commit a ton of money to that thought right now. Only because of the trend line being hugged right here and if breached, we could drop fast. Best thing to do right now is keep tight stops and go to cash if things turn for the worst.
I can't stress enough to preserve your capital so you can live to trade another day. This is one of the most important rules in trading. I've put it down in black and white in an example below so you can see for yourself how important this rule is. Please take this into consideration when trading; it will save you every time. I want to show tonight the importance of controlling your trades. By this I mean letting your winners run and cutting your losses immediately. In the following example, you'll see how we can lose 4 out of 5 trades and still make money. I'll use HEC as an example of our 1 winning trade. We bought that stock at .52. It proceeded up to .98 before coming back down. If we had sold at .98 we would have made 88% but I know we can't always sell at the high so I'll use a 50% profit in my example just to be more realistic. I'll also use round numbers just to make it easier to see.
$10,000 cash position to start
Make 5 trades with $2,000 in each
Buy $2,000 HEC at .50 = 4,000 shares, Sell at .75 = $3,000 for 50% gain
Buy $2,000 XYZ at .50 = 4,000 shares, Sell at .45 = $1,800 for 10% loss
Buy $2,000 YXZ at .50 = 4,000 shares, Sell at .45 = $1,800 for 10% loss
Buy $2,000 ZXY at .50 = 4,000 shares, Sell at .45 = $1,800 for 10% loss
Buy $2,000 YZX at .50 = 4,000 shares, Sell at .45 = $1,800 for 10% loss
You've just lost 4 out of 5 trades but your bottom line is still 2% ahead.
Your balance is now $10,200, with commissions you'll probably break even. I'm showing you this example tonight so you can see, even if you are only right 20% of the time, you won't lose your money if you maintain discipline and follow the 10% / 10% rules I've followed most of my trading career. That is of course, no more than 10% in any one position and no more than 10% loss on a bad trade. The 2nd rule is always the hardest and even I sometimes still fail on this one. But there is absolutely no excuse to fail on the first rule. The fastest way to the poor house is putting all your eggs in one basket and having the trade go bad on you. This will end your quest for financial freedom faster than you can say “oh no, what did I just do with my hard earned money?”
The above example is very conservative because we have had many stocks that have made way above the 50% figures used and not so many losing trades of 10% or more. We will be right more than we are wrong and I'm sure we can get 6 out of 10 trades right or even as much as 7 out of 10 for a 70% win/lose ratio. In the above example, remember, we only have to be right 2 out of every 10 trades. So if you think you can follow the disciplines and be right more then 20% of the time, how can you not make money in this market? It works for any priced stock. You can start with 50K and buy 100 shares of a $100.00 stock. Be right once and have the one winner go up to $150.00 a share and you could sell the other 4 for $90.00, 10% loss and still come out ahead. No matter what price you pay, just stick to the rule. This is a big reason why our Trade Record is up 118% in 5 months. I follow the rules for the most part. I trade my money as if it was yours and I do not want you to lose your money.
Please follow these simple rules and you will be around with us trading and making money for a long, long time. One other favor I would like you to do tonight is, print this commentary out and put it somewhere near your computer. Look at it when your trade falls below the 10% loss rule. Maybe it will help you remember that if you stick to the rule, you will make money.
There were not many charts that were set up well in my scans this weekend. Precious metals stocks are making a nice run here. Maybe we shouldn't have given up on the ones we had so soon. They sold off when the NASDAQ rallied a couple weeks ago and now they are moving well when the techs are pulling back. Keep an eye on past bulletin precious metals stocks like WHT, CBJ, CBE, CAU and BGO.
I'll see you all Monday night
Earnings Calendar.
http://biz.yahoo.com/research/earncal/20031023.htm... |
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