Part 4 – Steps 10 – 12
This is the fourth and final in a series of Tidbits explaining how I make investments. In Part one, I covered the activities I engage in before I even begin using the Trending Stocks platform. In Parts 2 and 3, I covered steps 1-9 in my process. Today we cover Steps 10 through 12. – John Duffy, CEO, Trending Stocks
The steps are not time consuming or difficult. My goal is to lay out the process in a manner that is very easy to follow and explains the rationale for my approach.
- Step 10. I always use the Trending Stocks, Trade Risk Calculator. It is where many pieces of the investment puzzle, and Risk Management come together.
The role of the Trade Risk calculator is to determine the proper number of shares to buy in order to stay within my personal Risk Tolerance.
It also highlights the fact that my investment in a particular stock may exceed my Position Size guidelines (discussed in Part 1).
What do you do when that happens? Here is an example.
For this exercise let’s assume that the stock in question costs $20 per share and the Stop Loss was set at 10%. Therefore, I am prepared to have $2 at risk (lose) on every share that I purchase making my loss limit $100.
The Calculator indicates a purchase of 50 shares of that stock. Fifty shares with a risk of $2 per share equals $100 of total risk for that purchase. And it just so happens that 50 shares at $20 cost a total of $1,000. Which happens to be the exact position size set way back in Part 1, paragraph B.
In reality, that doesn’t happen often. It is more like this: The stock cost $20 but the stop loss percent is 20% or $4 therefore, the Calculator will only recommend buying 25 shares at a cost of $500.
Of the two variables (position size and risk) risk is more important. And therefore, you would only buy 25 shares.
There will be situations where your risk will allow you to buy more than the recommended position size and here again risk is more important. So, you can buy more shares or choose to buy less and reduce your risk even further. The position size fluctuations tend to even out and you end up with just about 25 stocks in your portfolio.
- Step 11. Now that I know the stocks that I wish to invest in; the number of shares to purchase; and the approximate cost, I’m almost ready to make my purchases. Almost.
I frequently have more stocks on my Buy List than I have cash to purchase. Therefore, the last check I like to make is to review the analyst report at my broker, i.e., TDAmeritrade.
If the analyst gives the stock a Buy or a Strong Buy, I’m prepared to move forward. If not, I’ll check my other stock picks to see how they fare before I make a final decision.
I use this as just one of the factors I consider. A poor analyst report at this point would really be a surprise and I don’t like surprises, especially when it involves my money.
- Step 12. I now make the stock buy(s) in line with the Trade Risk Calculator results.
Immediately after the purchase is completed, I’m ready to enter a Trailing Stop Loss Order (sell transaction) using the Stop percent, as calculated by Trending Stocks. I set it for exact number of shares and percentage below the recent purchase price.
Now here is a point I’d like close with.
Immediately after purchasing the stock, the risk on one that transaction (25 shares at $20/share =$500), against my portfolio principle of $25,000, is $100 ($4/share x 25 shares).
If the stock’s price were to now increase to $21 (25 shares x 21 = $525), the trailing stop loss moves up so my overall risk is still $100.
However, the risk to my principle of $25,000 is now only $75! I am $25 ahead so my risk of $100 is a ‘shared’ risk. ($25[house money] + $75[original investment]=$100)
This is an important point.
As the price of the stocks you own increase, the Trailing Stop Loss also moves up. Eventually when the value of all of the increases exceeds $2,500, the total value of the portfolio becomes $27,500.
At that point you still have $2,500 at risk, but you are now, as the saying goes, Playing With House Money!
And that is a very good feeling!
This concludes the description of the Quick, 12 Step Investing Process that I use.
QUICK 12 STEP INVESTING SUMMARY
* Decide the size of portfolio ($25,000) and the ideal number of stocks (25) when fully invested.
* Determine position size (portfolio / stocks = position size = $1,000).
* Determine % of portfolio to have at risk – this is a personal consideration based on your personal risk tolerance.
* In this example, I selected 10% or $2500 for my maximum risk at any time. This equates to $100/stock. (risk / #stocks = risk per investment)
All of this information can be found on the Trending Stocks Dashboard. I eliminate stocks at every step. And most steps impact Risk Management.
- Step 1. Check Sector Report for best performing Sectors.
- Step 2. Execute the Detailed Search for the Trending Stocks in those performing Sectors, for 20 Days Trending and I select a maximum price point.
- Step 3. I check the Icons (Red, Amber, Green) in Today’s Reports for those stocks and eliminate all that are Red. An Amber condition is created by low Volume or High Volatility. In this step, if Volume is less than 500,000 shares, I do not consider that stock.
- Step 4. Armed with the stocks that passed first three steps, I run the 200 day trend on the Graph for each stock. I look for solid growth with few spikes or troughs.
- Step 5. I run My Watch List to see if it ids other stocks of interest and if it ids any of the stocks I just selected.
- Step 6. I go to the Search by Stock function for each of my selections and check the information on Today’s Report. I compare the year high with the closing price.
- Step 7. I now look at the Volume and if it is less than 1,000,000 shares, I am unlikely to keep it on my list.
- Step 8. I then check Volatility to see if it is Acceptable. If so, it stays on the list.
- Step 9. Trending Stocks has calculated a Stop Loss amount ($ and %) for each stock based on that stock’s Volatility. And I Always use the Stop Loss, specifically the Trailing Stop Loss.
- Step 10. By this time, I have a short list of stocks that have passed each step. I use the Trade Risk Calculator help manage my Risk. By inputting the Trade Risk amount, the stock symbol, closing price, stop loss amount, etc., it calculates the the # of shares to buy to stay within my Risk Tolerance and the cost of those shares. This leads to the final position size and is an important element of Risk Management.
- Step 11. I go to my Broker, look at their analyst report for my short list of stocks to make the final cut. If this report is also favorable, in most cases, I will buy the stock.
- Step 12. Immediately after buying a stock, I execute a Trailing Stop Loss Order based on Trending Stocks calculation and the Trade Risk Calculator.
The time it takes to complete this process depends on the number of stocks I am considering. For any one stock it only takes 5 or 10 minutes.
Everyone has their own approach to investing.
For me, by following this process, I have created a portfolio of trending stocks in a manner that protects my downside risk, locks in profit and gives me the opportunity to grow wealth.
Trending Stocks is a robust and feature rich platform that can help you to do the same.
Thanks again to Patryk S. for requesting this series. It may generate more questions, so please send an email to email@example.com and ask!
Please consider taking advantage of our 4 week free trial to determine for yourself how Trending Stocks can be of value to you.
And always remember to “Ride Your Winners and Cut Your Losses”.