Back to school tomorrow after the 2 week easter break, which sucks a bit. Been getting well into the stocks during the holidays – but also looking forward to getting back into a routine.
Anyway my internet was wrecked earlier today, so I was sitting around working on some capital management systems for trading. Nothing special, just devloping some financial rules for my portfolio and profit taking etc.
It’s fast dawning on me that money management is just as important as the stocks themselves. Until now I’ve had no rules, which has really hampered my development as an investor.
My old rules/mistakes:
1. Pick stocks based on fundamental research, give the chart a glance with a very uneducated eye.
2. Don’t set profit targets. I wanted as much as I could get, so wasn’t happy unless the number was high.
3. Look at monetary gains over percentage gains. Big mistake!
4. No automated stop losses, which destroyed me on ASG and has led me to go long.. long.. longer on SEO.
5. Tying up my cash too quickly, and for too long.
6. Buying small holdings <£400, brokerage costs are just too much if it goes wrong, and often right!
7. Buying stocks based on them “looking good”, and not trading the trends.
8. Cluttered trading journal getting confusing with so many stocks on watchlist etc.
So there’s 8 parts of my game I have identified and am now currently working on stopping them out.
New rules for old mistakes:
10. Be realistic about the type of gains, and losses, that I can achieve.
9. Studying stocks thoroughly using in-depth technical analysis and my preferred indicators of MACD, RSI, EMAs, Stochastics. Then skimming over some fundamentals and research on what the company is doing, but focusing 90% on TA.
8. My technical analysis should provide me with sell indications just before or as the stocks run out of steam. I don’t care if it’s £5, £50 or £250, it’s money in the bank if I sell it right there – allowing me to reduce my exposure.
7. Guaranteed stop losses as part of my trading strategy. Depending on the stock, they may be as tight as -3.5% to 7%. I will use trailing stop losses based on Parabolic SAR or EMA.
6. Wait for at least 3 signals before making a buy decision on a stock. I will also not buy a stock unless I have gone through it in detail on a yearly, monthly, weekly and daily basis and have checked all possible trends and resistance/support lines.
5. Invest >£1000 in each trade, unless a sell CFD. Reduces net purchase price per share, buy and sell targets met quicker.
4. For profitable trades, I will re-invest 35% into my trading account, and withdraw 75% of the profits as capital gains/petrol money.
3. Focus on a smaller number of shares each week and get a sounder understanding of their movements.
2. Buy UK300 companies or £50mn market cap stocks with >500,000 average volume per trading day. Liquidity, lower volatility and easier trend identification are 3 important new factors in my potential targets.
1. My number one rule: THE TREND IS YOUR FRIEND!
I will hopefully be able to integrate these new rules into my game quickly. Time will tell, but I will have to be commited to my rules and show no weakness in any trade, if it looks bad, get out – if the goings good, get out.
In other news, I continue, on paper at least, to indentify stocks due for losses much easier than those for gains. I have opened a paper account at IGindex.com, and I will begin to practice CFDs with play money later next week. Should I ever get into the Contract For Difference game, it will only be for shorting stocks, as I like to actually own stocks when I buy them. I will also try to pick <0.5% of stocks for this practice, as you really have to be right to get any gains. I will use ultra-tight stops on CFDs. They offer a good opportunity to gain exposure to money using 10% of the capital it would cost to own the stock outright. However, you can lose a hell of a lot more by the looks of things. Anyway, I figure £1000 in a CFD account, looking for initial margins of around 50 with a 2 CFDs at a time could be ok.. Anyway, I will treat the 100k like it was 1k and divide all gains by 100 to give me an indication of how I’m doing.