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Tuesday, June 22, 2004
Good evening friends,
Market Recap
It was a good day for the markets as the Dow closed up +23 points and the NASDAQ closed up +19 points. These moves are nothing earth shattering, but it is a good day as both indexes closed near the highs for the day after being down sharply for most of the day. Hammer candle sticks are formed on days when the markets head lower intraday and come back to close above the open. These hammer formations are very bullish and could signal a move up is coming. Hammers are normally followed by an up day the next trading session.
The big three indices are all above there respective 50 and 200 SMAs, and this is also a very positive sign. I think the market is starting to set up for a possible rally on a Fed interest rate hike. As I have discussed in a previous commentary (and will not bore you with again) this would be contrary to what should happen when rates rise. The charts are starting to set up well so we will see how they react on June 30th.
5 Percent is 5 Percent
Five percent of your portfolio is five percent of your portfolio - no matter what the price of a stock or how many shares you buy. The comment “I can't afford to buy XYZ because the share price is too high” has come up a few times so I will address it tonight.
In these examples, I will use round numbers to keep things simple. If you have a 100K portfolio and you would like to allocate 5% on each trade, you have to think of it in terms of dollars. 5% of 100K is $5,000. Say you want to buy two stocks; the stock A costs $5.00 so you would buy 1000 shares (1000 x $5.00 = $5,000). The stock B costs $50.00 so you would buy 100 shares (100 x $50.00 = $5,000).
Now, if the $5.00 stock A goes up to $5.50, you can sell for a 10% gain and make $500. Likewise, if the $50.00 stock B goes up to $55.00, you can sell for a 10% gain and make $500 as well.
The point is that the cost of a stock does not matter as long as you allocate 5% into each trade. If you do this, you can trade any stock you want regardless of price.
By putting 5% into each trade each time, you will compound your gains as your account grows with each winning trade. In the example above, you can now allocate more than $5,000 into each trade because you just made a combined total of $1,000 on your first two trades. 5% of $101,000 is now $5,050. (Note: You will be buying odd blocks of shares if you were to hold yourself to the 5% rule.)
Our Spreadsheet
At TWPD, we have a spreadsheet that tells us how many shares to buy of any stock to make up 5% of the current portfolio balance. There is a formula that tells me what dollar value exactly 5% of my portfolio balance will be at any time. All I do is enter the price of the stock and the 5% dollar figure and it calculates the number of shares I need to buy to make up 5% of my portfolio. This is the simple formula the TWPD trade record is based upon. The returns are calculated based on this compounded 5% in each trade as the portfolio balance grows.
For my personal accounts I always round off to the nearest 100 share block, keeping the trade as close to 5% as possible. If you do not have a way of calculating exactly 5%, you can always round to the nearest 100 share block. The key is consistency. You never want to buy 10K in one stock, 5K in another and then 6.5K in another. Without consistency, your gains and losses will be sporadic, and you will have a tendency to place more on the next trade should you lose on the previous trade. This is the basis of sound money management, and in my opinion, one of the most important rules of trading.
The Three Percent Risk System
I have another risk management technique that virtually guarantees a maximum loss of 3% on a losing trade (providing there are no gap downs of course). It is a more complex formula, so I will need the weekend to put it together for you. In a nutshell, this formula put more than 5% at risk in any one trade. Because of this risk, TWPD will not use this 3% risk formula for our trading. I have used this formula before in very aggressive accounts, but I feel it is too aggressive for the purposes of this service and our average member. Nevertheless I will present it to you in a future commentary, and you are welcome to experiment with the Three Percent Risk System.
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Tomorrow evening.
OTC BB Watch List
- CCLH
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