Weekly Portfolios: Part 3 & 4
Part 3
Sizing the Initial Portfolio:
Lets say you have found 6 to 10 stocks that all look like potential candidates. One can either acquire an equal dollar value of each, an equal number of shares, or spread the money around based on some personal preference. I don't recommend the last. Its harder to manage risk, and personal opinion is usually wrong, and when it isn't wrong, its probably coincidental or luck - nothing worth counting on in the markets. I will grant that luck helps as much as skill in trading, but it can swing bad as well. My minimum buy is always 300 shares, as given typical trading costs, the stock only has to move about 1/8 point positive to cover in and out commissions ($15/order average assumed here). Also, if need be, one may wish to enter an order to sell "All or None", and in those cases it requires a minimum order of 300 shares. Of course, how much seed money one has to trade with will determine the number and size of the trades, 8 stocks at $12 for 300 shares each averages about $ 28,800. Scale your initial entry according to your resources. If you have $10,000, buy 150 shares of 6 stocks, and if you have $120,000, buy 1000 shares of 10 stocks. I do not recommend buying more than 1000 shares of anything, even $1 stocks, until one has acquired the time and skills to manage those accounts. Buying even dollar amounts of stocks is the other way to do it, and one could get $1500 worth of 6 stocks, but my personal experience says they are harder to sell and accounting is a nightmare. Remember to account for your trading fees when estimating your potential buys.
Entering your orders:
So now you know what stocks you want to buy, how many shares and a general idea of what you want to pay. You know the last part because when you were doing the charting you extended the ruler line for about two days ahead of today and guessed what the low would be at that point. If your stocks are moving steadily and in small appreciable gains, that will only be a few ticks above today's close at most. Set a limit buy at that price. Alternately, one could set the limit buy at today's close, and that would assure entry in most cases. A limit buy says you will pay that price or less for it. If the order isn't filled that day, then you can either enter at market the next morning, or set another, higher limit entry. The point is not to buy at market initially, or get caught paying the intraday high. If you see your order was not filled because the price rose too fast, wait. Raising your price only means that you are going o be paying some trader for your mistake when he sells that afternoon. Stocks have a trading range, and you want to buy as close to th low of that as possible. There are 10,000 equities out there, and it is better to wait a few days or a week to find another than to have to recover your loss before starting to profit. And, you can always see what the day's trading did and choose to try and enter tomorrow.
Setting and Adjusting Stops:
Assuming you did all this work on weekends, and most of your orders filled Monday morning (the recommended entry day), you will need to set a protective stop. Wait a couple of days. I prefer Wednesday nights just because any early week volatility has died down a bit. Set the exit stop at 8-10% below whatever you entered at. There are a couple of caveats here - if the stock dropped below that before you got around to setting the stop, wait until Friday and set it at 5% below the low for the week. Don't immediatly sell if the stock gapped down for some reason. If you did the little bit of homework to pick the right kind of companies, it will usually recover.
One should look at the stock a couple of times a week and decide if the stop needs to be raised. I suggest a mid-week night and the weekend. This is called a trailing stop, and allows you to protect improving profits. Don't worry if the stop fills and you see the potential for the equity to rise further. Nothing says you can't rebuy it at an equal or higher price for the next gain. If the stock price has improved and is trading no lower than the low for the last week, set the stop slightly below below that low as shown on the 5 day chart. I would clarify that last sentence by saying tha if you are buying stocks this way, you don't want something like ASND or another intraday volatile stock you have to constantly monitor.
Part 4:
When stops fill:
Some of your picks will go down and the stop will get filled and you will have some cash in your account. If you have been looking at a stock and want to enter - repeat the steps above and place the order. Better to wait until the time you have set aside to do this - Sunday afternoon or whatever, and just let the money sit in there. One doesn't need to be in the market 100% all the time. Stocks will rise and fall and new candidates surface every day.
Adding to Positions:
Some stocks move nicely during the time you hold them and others do not. When a stop is filled and you have the cash, consider adding more shares to one that you already hold - up to about 1000 shares maximum. If none of those look like viable candidates, then add a new one, keeping in mind diversification and potential. But take your time. if nothing looks good, wait a few days or a week. The object is to be comfortable with the choices you made, not to be always in the market or compelled to monitor the portfolio. it should be self-protecting with the stops. Besides, if you don't have any cash in the account, you can't buy anything.
Taking Profit/Exiting stalling stocks:
If you have held a stock for a couple of weeks and it hasn't moved, review it to see if it still looks like one with the potential. If it does, keep holding and move the stop up, but only add to it when it starts to move. If it doesn't, you can set a limit or market stop to exit the next morning. Another method is to find a new stock or one you want to add to your position, and place those orders in sequence. Again, there is nothing to prevent you from buying the same stock again if you see it starting to move when you thought it was done climbing. All the would-have, could-have, should-have thoughts are non productive. Buy it again if you like what you see. Treat the stock every time you look at it the same as you did the first time you found it. Ask, "Would I buy this now?" If the answer is yes, then add to your position. Hold if the answer is 'maybe' and you still think it has potential. Sell if you don't. Its better to be wrong and out of the market than right and unsure why. We don't learn only from our mistakes, but we seem to remember those more clearly. Especially when they cost us money. So adding to a present position allows you to perhaps learn from a success, or at least a different kind of failure.
So how much profit is enough? The answer really lies in the chart. Trendline it. If its still moving nicely, hang on, perhaps add to your position. If it flattens and stalls and the volume drops off, you might want to sell. Hold if you believe there is more growth to it. But remember, the average rising stock only goes up about 15% up before correcting or leveling. A good mover's profit margin is 20% and only about 5% make a 25% or greater gain. With all the posting on SI about the stocks that rocketed up, one tends to lose sight of the reality of the markets. Keep that in check by making honest assessments of the charts. If the chart is going up, you're making money, and if its going down, you are losing money. And no amount of hype or wishing or 'I believe...', or 'it should be...' or 'it is going to...' ever changes the facts. |
