Above is the EIS Notional Portfolio which has been started based on the
virtual trading room email service. These trades are actual trades from the
weekly list of stocks that we have published. To explain further the system
we have used to enact these trades, below are our rules and strategy that
we have employed. Also here we feel it is worthwhile talking a bit about
trading discipline and tying this back to how we have traded the notional
portfolio. By trading discipline we mean entering a trade because a
pre-determined set of trading criteria are met, with maximum downside (stop
loss) and minimum profit target calculated beforehand. Also once the trade
is entered into, using a pre-determined trading system to manage the open
trade so that taking a loss is no problem or that profits do not turn into
losses.
Which Stocks Meet our Pre-Determined Criteria ?
The first step in our process is to determine which stocks we are going to
trade. The approach that is used is to scan the stocks for those that show
a market action or pattern we believe has a high probability of success.
This means taking the time to study past market behaviour and then
rejecting opportunities that do not satisfy all the criteria we have set
ourselves. Normally, the stock must break upwards of a certain
pre-determined level in order for the stock to show us this probability of
success. Those stocks which have broken upwards of our pre-determined and
quoted levels are then activated and an open position then created. This
break upwards of our pre-determined level must occur during the week of our
published email to you. If the breakout occurs during the next week, then
the trade is not activated for the notional portfolio.
Entering the Trade & Money Management Rules
Before entering each trade, a pre-determined level of loss (stop loss) has
been calculated as well as a defined amount of capital which will be put at
risk for the trade e.g.. 1% of $50,000 trading capital is $500. (Please
refer to our web posting on stop losses to gain an understanding of where
to place the stop as well as how to manage it throughout an open trade).
Once the stop loss level is determined, the next step is to determine you
many shares can be brought in order to stay within our trading capital risk
amount. So for example if we buy the stock at $1.10 and determine the stop
loss to be $0.98 and we wish to risk $500, then the formula is as follows:-
$500 divided by ($1.10 - $0.98)
= 4166 or 3500 shares
when brokerage and costs are taken into account.
This way if the stock breaks below our stop loss level (in the above e.g.
at 98cents) and determines a new down trend, we get out with a loss of $500
only or 1% of $50,000 trading capital.
Make no mistake, taking losses is probably the hardest thing to do as a
trader, however the first thing to realise is that losses are inevitable
and the sooner you employ a disciplined approach, as outlined above, the
sooner you will turn your trading into a profits. Losses are not a personal
reflection on you the trader/investor. Automatic execution of losses using
this system, removes the second guessing and eliminates the procrastination
that turns small losses into large losses.
Exiting the Trade
Once in the trade, the final leg of the journey is where to exit (again it
is worth visiting our web posting on stop losses here). We have used a s
ystem of first determining a target exit based on our analysis of market
behaviour. The target exit should be calculated before entering the trade
in order to determine if the profit we take from exiting at the target
price is great than the capital we are risking on the trade. This is a
highly important part of trading discipline. It is critical that you can
make more profits from a particular trading opportunity, than you are
prepared to risk on it.
Hesitation and Psychology
It is quite a different proposition to actually enact these trading
opportunities when they break out than to simply analyse which stock to
trade and when to get into them. This is also made worse when confronted
with a series of losses with our trading and we tend to second guess our
system and own abilities around it. The ability to execute a trade without
regard to the outcome (stop loss taken or profit made) is the key to
consistent results.
As a final note on this, the more confident we are, the less concerned we
are with the immediate outcome. Therefore when we start to feel hopeful in
a losing trade, or start counting the cash in a winning trade it is time to
assess your trading system or more importantly your mental discipline and
state of mind.
