Beating the Market with Money managment

[220volt]

Neet,
Thanks for the great advices.

You said that some of the stocks will do 3% in a day and I see lot of them do that (even blue chips), So you think I should maybe up my 3% gain cap along with 1.25% loss cap so I don't get stopped during the day?

What would be in your opinion be most optimal stop loss and gain cap for this kind of strategy?
I know it would depend on what I would trade but lest say i trade mid caps in strong performing sector and i use MACD, trendlines and RSI to jump on the trend.
What would be optimal get out if I wanted to make 3% a month.

Would love to hear ideas on what kind of classes(small, mid large, foreign ect) or sectors would be most suitable for strategy like this in bull or bear markets.


Thanks again

 

[Neet]

Quote from 220volt:

Neet,
Thanks for the great advices.

You said that some of the stocks will do 3% in a day and I see lot of them do that (even blue chips), So you think I should maybe up my 3% gain cap along with 1.25% loss cap so I don't get stopped during the day?

What would be in your opinion be most optimal stop loss and gain cap for this kind of strategy?
I know it would depend on what I would trade but lest say i trade mid caps in strong performing sector and i use MACD, trendlines and RSI to jump on the trend.
What would be optimal get out if I wanted to make 3% a month.

Would love to hear ideas on what kind of classes(small, mid large, foreign ect) or sectors would be most suitable for strategy like this in bull or bear markets.


Thanks again

I like to use a 3:1 ratio on stops and sell, as previously stated, using a .75% trailing stop,when my goal is met. Why ? It allows you to be wrong most of the time and end up in profitability, that is just a beautiful concept. On top of that, you MUST cut your losses and let the winners run, therefore with the above stated strategy you are looking good.

Before entering the trade, check the stock characteristics by looking at past chart history. For example, AAPL is very moody, so is AKAM but MSFT is more stable, etc. Learn about the stock beta.

Oh one more thing, dont get too fixated on the 3% per month goal, it's not going to happen, not at first. In fact, at first, be happy with a 1%/month gain !
Diversify the swings, even if you got the stops in place.

What if you are on X swing and the stock gets downgraded the next morning ? It would run through your stop like knife through cheese. It's important to diversify to avoid these pitfalls. If you got say 10k to invest, then I want you using no more than 2500 per swing.

Last but not least, never ever ever ever ever ever ever change a stop loss or average down.

 

[kut2k2]

Quote from Trvlwanderer:

This does not correlate to flipping a coin. The risk is the amount of the stop on the $ put forward. If you buy one stock X number of shares) for the whole 10k with a stop at 1%, you are risking $100, not the 10k. Depending on the stock/overnight hold/bad news etc...if the stop is in place and their is little likliehood of a gap past it, the risk is managed. Can't do that with a coin toss. Successive losses with that kind of management is drawdown.

The coin flip was merely an example to get the OP thinking about optimal position sizing. Sorry if I left too much to the imagination.

And I must say that I'm always amused by "experts" who claim Kelly sizing can't be applied to trading. They apparently want somebody to hand the transposition of optimal position sizing from the betting world to the trading world to them on a silver platter. But that's typical of many traders when it comes to trading strategy in general.

 

[Trvlwanderer]

Quote from kut2k2:

The coin flip was merely an example to get the OP thinking about optimal position sizing. Sorry if I left too much to the imagination.

And I must say that I'm always amused by "experts" who claim Kelly sizing can't be applied to trading. They apparently want somebody to hand the transposition of optimal position sizing from the betting world to the trading world to them on a silver platter. But that's typical of many traders when it comes to trading strategy in general.

Response was to the fact that you may have been a bit above his head based on his earlier posts (no offense to either). I understand the coin toss analogy.

You are right that most do not understand position sizing or MM in general. Base capital preservation vs. risk per trade, drawdown. As opposed to gambling (house keeps the edge), you can limit the risk while expanding the reward (obvious risks and variables applied).

 

[rateesquad]

The Kelly's formula is not a bad start.........

Although there is no formula that I KNOW of which implies on how to take profits from the market.

This is what I am going try to achieve during my Winter vocation.
That and learning Econometrics in 30 days.......and getting hammered........wow alot of things to do......no time for sleep.

PS.....I will try to compound the profit taking formula.....based on Kelly's formula......but revising it alot........IF anyone has any ideas I will be happy to discuss mine.

 

[kut2k2]

Quote from rateesquad:

The Kelly's formula is not a bad start.........

Although there is no formula that I KNOW of which implies on how to take profits from the market.

Apples and oranges; don't confuse the two.

Kelly is position sizing (aka money management): deciding how much money to trade in the instrument of choice. Profit taking is exit strategy: deciding when to bail from the instrument of choice.

Kelly's formula for a casino game makes assumptions that don't apply to trading, so you have to go back to first principles.

Good luck.

 

[220volt]

I just wanted to add aboput Averaging Down. Not really a MM but it is its close cousin.

Averaging down to me seems like a good idea for indexes or overall market since they will recover sooner or later, but not for individual stocks.

For example:
People who were just buy/hold SPY or QQQQ during big bear move from 2000-2002 are still not break even after 4+ years, but if they were averaging down during that time they would be well off now, so averaging down when you know that odds of recovery are big is a good idea to add to your trading/investing tools.
But it would be bad idea on speculative stocks. I don't really see why people knock down Averaging Down if you are holding the fund or index for long run.

here are my thoughts on this:
- Adding to a winning position( averaging up) will produce bigger losses on retracement
-Adding to a loosing position will produce bigger gains and faster recovery when market rallies again
-Adding to a loosing position when that security never recovers is a disaster.

Any thoughts on AD is appreciated.


Here is part of the chapter from Ryan Jones's "Money Management:

The simplest definition to cost averaging is to add onto a losing
position. There are exceptions, but this is the most common use of the
method. For example Joe Trader invests $5,000 in a mutual fund at
$17.00 per share. Most mutual funds allow fractional shares and
therefore Joe Trader has 294.11 shares (provided there is no load). As
time moves along (as it normally does), the price of the mutual fund
slowly drops. Several months later, Joe Trader decides to invest an
additional $5,000 into the fund at $14.80 per share. Because of the
drop in price, Joe is able to purchase 337.83 shares of the fund with
the second $5,000 investment. Joe now owns 631.94 shares of this
mutual fund at an average cost of $15.82. Joe’s average price for each
share of the mutual fund dropped from the original price of $17.00
down to $15.82. Thus, the price of the mutual fund does not have to
move back up to $17.00 for Joe to recoup the losses from the initial
$5,000 investment, it only has to move up to $15.82.

$15.82 avg. price x 631.94 shares = $9,997.29
(if we carry the decimals further it will total $10,000)

$10,000 total investedl631.94 total shares = $15.8242 avg. share price
This can go on for a considerable time.

If the share price of the
fund continues to drop, Joe may have a plan to invest an additional to $12.00 per share, Joe will have invested as follows:

$1,000 at $14.30 p/s = 69.93 shares Total shares = 701.87
$1,000 at $13.80 p/s = 72.46 shares Total shares = 774.33
$1,000 at $13.30 p/s = 75.19 shares Total shares = 849.52
$1,000 at $12.80 p/s = 78.13 shares Total shares = 927.65
$1,000 at $12.30 p/s = 81.30 shares Total shares = 1,008.95

Joe now has $15,000 invested in this fund at an average cost of
$14.87 per share. For Joe to recoup the losses, the fund has to move
up to $14.87 per share. If the fund moves all the way back up to
$17.00, then Joe will have profits of $2,152.15, or a 14.34 percent
gain on his investment. If Joe did not cost average, the investment
would simply be a breakeven.

 

[Neet]

I would be very careful when averaging down.

In fact, don´t do it unless it´s part of the plan and NEVER when the stock moves against your trade.

You are correct that averaging down indexes is less risky but there will be times where they go up nonstop or simply collapse and this catches you on the wrong side, RIP.

Averaging losers makes you a loser.

Only average down when scaling in your original PLANNED position.

Good luck and keep on studying, you are on the right track just stay off temptation (ie averaging down).

 

[220volt]

Thanks for the advice.

My main focus right now is to learn since i don't have enough trading capital.

I have around $2000 that I can spare on investing and i can add $1000 a month, so I'm trying to come up with the plan. i am not really sure if I should start investing at first since i don't have enough for trading until my account reaches $20,000 lets say.

Commision at Tradeking (where I am at right now) is $4.95 and it's pretty cheap but it would still eat away at my account if i start active trading.

I thought I'd post here to get some advice.

Thanks

 

[Neet]

Quote from 220volt:

Thanks for the advice.

My main focus right now is to learn since i don't have enough trading capital.

I have around $2000 that I can spare on investing and i can add $1000 a month, so I'm trying to come up with the plan. i am not really sure if I should start investing at first since i don't have enough for trading until my account reaches $20,000 lets say.

Commision at Tradeking (where I am at right now) is $4.95 and it's pretty cheap but it would still eat away at my account if i start active trading.

I thought I'd post here to get some advice.

Thanks

No problem.

You might want to try a service that apart from being excellent offers great paper simulation, thinkorswim.com, good guys good broker.

Test your strategies on paper while you continue to save. When you reach 30k, start trading real money with VERY SMALL positions to get a feel for trading with emotions. Why 30k and small positions ? Need a minimum of 25k to daytrader properly according to federal rules regardless of how small the transactions are.

Why 30k and not 25k ? In case you make a mistake at first, very likely.

Once your small positions trades CONFIRM your consistency during bearish, bullish and sideway markets you can go ahead and up the ante.

When you get there you are a successful daytrader.

I can live off 30k, 50k or 100k easily, I dont need hundreds of thousands of dollars to beat the market. Don´t let the amount of capital fool you.

A good trader with 25k will outplay a mediocre one (notice I didnt say bad) with 150k.

One more thing, if you are consistent with paper trading don´t skip the small position suggestion I gave you, part of becoming a successful daytrader is overcoming emotions. Emotions that do not exist when you papertrade.

Off the top of my head and I´m not sure if I mentioned it before is that it is absolutely critical that you keep your losses small, which is why I am 100% against avergaging down.

Small losses are no problem, remember that. It´s payign for information, that is all. It´s when they get out of hand due to your stubburness and ignorance that things get ugly. Once you master keeping losses to small levels then move onto letting your winners run which is imho a harder thing to do, at least for me.

Daytrading is not easy. In fact, the market is developed in a way where it is easier to lose money than to make it when daytrading. You need an edge to survive and this edge cannot be obtained in a short period of time regardless of your IQ. Takes discipline, money management, techniques, and most important lots and lots of experience.

Good luck, keep on studying, lots to learn.