An Experiment In Not Losing Too Much Money

[Snow Leopard]

Subtitled: Loose Trading Loses Money. (4 jonu )

So this is concerned with buying stocks with the intent of selling them at a higher price later in order to make a profit.
In a word: Trading Long. (OK, in two words).

Buys are limited to stocks in the ASX300 at the time of purchase.
The initial 'cash' for this experiment is $25,000, which creates the first set of problems - it is not a lot of money.

Among the rules of trading are that you:
- never risk more than 2% of your capital on any one stock;
- have diversity in your trades;
- cut your loses;
- let your profits run.

Best Wishes
Paper Tiger

[jonu]

Ahh, but are you talking about loosing - as in freeing up, or perhaps more appropriately, losing?

[Snow Leopard]

Trade #1:
Date: 10-Mar-2015
Buy: 375 ASX.RMD (ResMed Inc) for $3,307.50 ($8.82 each),
brokerage of $15.37;
total is $3,322.87.


Minimum No-Loss Sell Price: $8.905.


Maximum Risk Amount: 12.5% of buy.
Risk Sell Price $7.795 (about where the green line hits the right hand edge); (loss $415.36)

ASX-RMD-20150309.PNG

Is joining a fairly rapid uptrend that is nearly five months old a good idea?
Time and the sell decision will tell.

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With only $25,000 total initial capital and brokerage at a minimum of $15.37, then $3,300 is [arbitrarily] chosen as one initial (maximum) limit on trade size - this allows 7 parallel trades and brokerage for the round trip is less than 1% of the initial buy.

[Snow Leopard]

Trade #2:
Date: 12-Mar-2015
Buy 1550 ASX.SPO (Spotless Group) for $3301.50 ($2.13 each)
brokerage of $15.37
total is $3316.87

Minimum No-Loss Sell Price: $2.15

Maximum Risk Amount: 10.8% of buy.
Risk Sell Price $1.90 (project a nice trend line across those three lows); (loss $371.87)

ASX-SPO-20150311.PNG

Listed for less than a year but a lovely uptrend - surely the sensible idea is to buy in when the price has just tested the trend line?
Time will tell.

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This and the prior buy of RMD were made by this simple process:
Find all the ASX300 stocks where the closing price for the day (9-Mar for RMD & 11-Mar here) was higher than any other close in the 12 months;
Pick any one;
Buy it next day.

[Snow Leopard]

Trade #3:
Date: 16-Mar-2015
Buy 1965 ASX.ASB (Austal) for $3301.20 ($1.68 each)
brokerage of $15.37
total is $3316.57

Minimum No-Loss Sell Price: $1.700

Maximum Risk Amount: 5.3% of buy.
Risk Sell Price $1.59 (a recent resistance level?); (loss $176.85)

ASX-ASB-20150316.PNG
[Piccy is of state of play after Friday 13th - not Monday 16th]

Sort of broke out from a couple of months rest from the uptrend. The price $1.59 figures reasonably often in this period as a high and/or closing value and so in theory makes a good (but tight) value to place a stop at.

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The idea is to look in on our portfolio at the end of the day and if the closing price for the day is below our stop value then, if we still own it, we aim to sell the next day.

This of course means that we may actually lose more than our at risk amount. But hopefully a decision to sell as been made before this final exit point is reached.

[Snow Leopard]

When I 'bought' SPO on 12-Mar-15 another candidate which could well have been chosen under the selection criteria was Sirtex Medical.

Doing a what if on this scenario would have resulted in:

Buying 85 ASX.SRX (Sirtex Medical) for $3326.05 ($39.13 each)
brokerage of $15.37
total is $3341.42

Even allowing for the full $500 risk then the stop loss sell price would have been set at $33.25.

Yesterday it closed at $17.53 and thus we would be selling today.

Assuming a sell at $19.00 per share in the early hours of trading then we would have realised a loss of $1,741.79.

================

By the grace of the good fortune the actual position of the portfolio at close of trade yesterday is a total value of $25,346.14 (or a gain of 1.38%).

Best Wishes
Paper Tiger

[Snow Leopard]

Trade #4:
Date: 18-Mar-2015
Buy 174 ASX.SRX (Sirtex Medical) for $3306.00 ($19.00 each)
brokerage of $15.37
total is $3321.37

Minimum No-Loss Sell Price: $19.180

Maximum Risk Amount: 7.7% of buy.
Risk Sell Price $17.53 (yesterdays close); (loss $255.78)

ASX-SRX-20150318.PNG

Price collapsed on a bad news item - now needs to find a new price to settle at.
An opportunity to try this portfolio's rules out on such a trade - not that one trade is a representative sample.

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I love this sort of thing happening and like to do short term trades, keeping a fairly close eye on goings on during the first few days.
In the real world actually bought in this morning.

[nzspeak]

This may be a dumb question but you said "never risk more than 2% of your capital on any one stock" which is $500, 2% of $25000 but as far as I know the ASX is closed far more the 50% of the time (weekend & after hours). What happens on black Monday when they ASX is closed? seems like you are risking far more than 2%. I apologise if I'm missing something but I don't quite understand?

[Snow Leopard]

This may be a dumb question but you said "never risk more than 2% of your capital on any one stock" which is $500, 2% of $25000 but as far as I know the ASX is closed far more the 50% of the time (weekend & after hours). What happens on black Monday when they ASX is closed? seems like you are risking far more than 2%. I apologise if I'm missing something but I don't quite understand?

Hopefully I can explain it first go but feel free to come back.

The idea of trading is to cut your losses and let your profits run.

When you initially enter a trade you set an initial price lower than your buy price where you accept that things are not going to plan and you sell. If you exit at this price you are so many dollars the poorer. However there is no guarantee that if things go seriously astray that you will not lose more.

The example in this post may be helpful: we set our risk at the full $500 (2% of portfolio) through our nominated stop loss, but actually lost $1,741, which is 7% of the total portfolio value.

But also that $500 represented a 15% drop in price on that one stock if we bought $3,300 worth.

If we were fully invested over the 7 trades with all the money we had and the market dropped then we could actually wear a reasonable significant (up to 15%) drop within our rules. (Though we might decide to get out completely, quick as, and be a spectator until things settle down).

Unfortunately we have not eliminated the risk of a significant market event really biting deep and we could end up carrying some serious losses.

So the 2% rule aims to stop you risking too much money on a single trade and help to mitigate risks.

You realise, I hope, that as individual trades develop we raise our exit prices and the risk/loss amount is reducing.

Best Wishes
Paper Tiger

Note to self: Position sizing.

[nzspeak]

When you initially enter a trade you set an initial price lower than your buy price where you accept that things are not going to plan and you sell. If you exit at this price you are so many dollars the poorer. However there is no guarantee that if things go seriously astray that you will not lose more.

I'm looking at your first trade- You have Resmed. I don't know Resmed but I do own a lot of FPH. I believe they roughly compete against each other and there share prices have both gone up exponentially together. FPH has a P/E well over 30 now and I believe resmed has as well. I would have thought spending 12.5% of your capital in a company with a P/E well over 30 in an illiquid market (ASX) isn't an 'experiment for not losing too much money'. I'm sorry if I'm being argumentative here, I'm just worried people might follow this 'safe' advice.
PS I haven't looked at your other trades so I'm sorry if I'm generalizing.