Originally Posted by lewdog:
I hope this can be helpful to some but risk management and capital loss prevention are huge if you want your account to grow over time. Without some discipline, all it takes is one bad stock purchase to wipe out months or years of gains. Too many people right now are looking for quick, large gains and comparing themselves to others. This leads to bad decisions and large draw-downs if the market or your stocks correct.
Rules that I believe help accomplish this.
1. Never put more than 10% of your total account value in any one stock.
2. Always determine your exit point if the stock heads south. Stop losses are crucial if this position is 5% or greater of your total account value because basic math will show you this. If it’s a penny stock and maybe it’s only a few hundred dollars and less than 1% of your total account value, a stop is probably not needed.
3. A stop market loss should never be set to greater than 10% loss. I track all my trades and try to keep losses to 4-8%. If I can double my gains compared to losses, I only have to be right on 50% of my trades to make a nice profit.
Why 10% position size and 10% stop loss makes sense….it protects your total account value in ANY kind of market. Let’s use a $10k account balance for easy math.
If a risky trader decides to use two, $5k position sizes to enter two stocks and doesn’t use a stop loss (hey it’s a volatile penny stock!). If one of those positions heads south and loses 50% that position is now worth $2,500. The trader decides to get out of that trade (finally!) and moves to a different stock. Now in order to get back to break even (original $5k), that new position must gain 100%. 100% just to get back to break even! You are now guaranteed going to try to enter riskier trades and look for even quicker profits, many times resulting in worse decisions and more damage to your total account value.
Let’s say this trader followed the rules I posted here. At most for his $10k account he would have a $1k position size. If he gets an entry and sets a stop loss at maximum 10% loss on this $1k position, at most he will lose is $100 on any one trade. $100 is only 1% of total account value. You still maintain capital to find smaller, quicker gains and not have to final a unicorn to gain 100% in a stock to get back to breakeven like the scenario above.
The worst feeling you can have is a huge drawdown on your account. I promise you.
Regarding your 10% rule. I do agree with you but what if you were early on a stock that blew up. For example, I was earlyish on Tesla and bought a bunch in the 75-200 range pre split. For that reason it's well over 10% of my total account value. Would you say that's the exception to your rule or would you try to diversify away from it and lower the percentage? [Reply]
Originally Posted by -King-:
Regarding your 10% rule. I do agree with you but what if you were early on a stock that blew up. For example, I was earlyish on Tesla and bought a bunch in the 75-200 range pre split. For that reason it's well over 10% of my total account value. Would you say that's the exception to your rule or would you try to diversify away from it and lower the percentage?
If you haven’t, take profits. Even if they sit in cash awhile until you find something you’re happy with. It doesn’t have to be all of it but take some profits.
I’m fond of taking profits to break even and let the profits ride awhile but others may disagree. [Reply]
Originally Posted by Hammock Parties:
Those rules would have taken me out of CCIV already, because the stock was so volatile early.
They are good rules for scaredy cats, though.
People don't have to be scaredy cats to be smart. That's all good advice.
I set up a new account this year just to be a little more aggressive in it and only put in $3500 to get it going. I'll add another 1500 shortly with a goal of getting to 50K by year end. I'm not following the smart rules in this account . it's Homerun or bust. BUT what I'm doing in this account is every time I hit a home run I add 1 share into each of the 5 ARK funds to protect my base. [Reply]
I stop loss after a profound run up and that's so I can buy back in after the inevitable pull back dips further than the stop loss. Ride the next run up. Rinse, repeat
Originally Posted by -King-:
Regarding your 10% rule. I do agree with you but what if you were early on a stock that blew up. For example, I was earlyish on Tesla and bought a bunch in the 75-200 range pre split. For that reason it's well over 10% of my total account value. Would you say that's the exception to your rule or would you try to diversify away from it and lower the percentage?
It about entering a trade with no more than 10% of your account, not about how much that stocks gains and results in it being more than 10% of your account value. [Reply]
Originally Posted by KCUnited:
I stop loss after a profound run up and that's so I can buy back in after the inevitable pull back dips further than the stop loss. Ride the next run up. Rinse, repeat
But I barely know what I'm doing so YMMV
At some point you won’t be trading in a bullish market and buying back in on a dip could result in your capital being tied up in a losing position (no stop loss on entry) for a long time if it doesn’t pivot and reverse trend. That’s where reading charts and technical analysis can make it at least better than guessing. [Reply]
Clay, can you provide any examples of stocks over $10? :-)
How long did you stay in IQ, what was the loss?
Also you realize getting stopped out doesn’t mean you can’t re-enter later? You’re acting like these $1-2 stocks that went south after you bought them had 100% certainty to go back up. That’s not always the case. The chart could tell you later if it makes a strong pivot and should be bought back in. [Reply]
Originally Posted by lewdog:
At some point you won’t be trading in a bullish market and buying back in on a dip could result in your capital being tied up in a losing position (no stop loss on entry) for a long time if it doesn’t pivot and reverse trend. That’s where reading charts and technical analysis can make it at least better than guessing.
Agreed on chart reading and finding bullish opportunities in a bear market [Reply]
