How to Lock In Profits on Every Trade
Richard M. Smith, PhDB.A. Mathematics   University of California at BerkeleyPhD Systems Science   Watson School of Enginee...
Presentation Objectives• Show you the most important thing that  investors can do to improve their returns.• Show you what...
Which do you prefer?            Bet #1•A: 80% chance to win $4,000; or•B: 100% chance to win $3,000
Which do you prefer?            Bet #2•A: 80% chance to lose $4,000; or•B: 100% chance to lose $3,000
Common Obstacles to          Success    i.e., why you might want to consider           something like trailing stops …
Those That Have Gone Before UsThe investor’s chief problem—and even his worst enemy—is likely tobe himself.               ...
Terrance Odean and Brad Barber  Haas School of Business, UC Berkeley  http://faculty.haas.berkeley.edu/odean/   Major acad...
Hard Evidence from Barber and Odean• According to a study of 88,000 investors,  “people are one and-a-half times more like...
Hard Evidence from Barber and Odean• A study of 10,000 investors by the University of  California’s Graduate School of Man...
Hard Evidence from Barber and Odean• In Nov. 2006, universities from around the world  jointly analyzed ALL trading activi...
Barber & Odean (UCB) – Boys will be boysImportant Research Conclusions• “Investors in our studies:   • Traded too actively...
Barber & Odean (UCB) – Boys will be boysImportant Research Conclusions (cont)• Investors were motivated by:     •Overconfi...
Positive Prospects (Gambles)Prospect #1   • A: 80% chance to win $4,000   • B: 100% chance to win $3,000Expected Value   •...
Negative Prospects (Gambles)Prospect #2   • A: 80% chance to lose $4,000   • B: 100% chance to lose $3,000Expected Value  ...
Prospect Value or Utility Function  • We’re more willing to let go of    the gains than we are to let go    of the losses....
What it takes to get even after a big lossPercent fall in share price     Percent gain required to get back to            ...
The Power of Compounding Interest
Behavioral Finance and Cognitive Biases• The Bandwagon Effect: It must be the right thing to do because  everyone else is ...
Behavioral Finance and Cognitive Biases• Anchoring: Rely too heavily on readily available information when  making a decis...
Goldman Sachs 2Q09 Earnings
Houston, We’ve Got a Problem!• We’re biased against selling our losers and holding our  winners.• We have other cognitive ...
Trailing StopsThe simplest and most intuitive method for reversing the tendency to hold on to your       losers and sell y...
Trailing Stop Example – JDS Uniphase
Trailing Stop Example – JDS Uniphase
What is a Trailing Stop• Set a stop-loss a fixed percentage below your initial  purchase price. If you bought at $100 and ...
Trailing Stops beat professional judgement
Why We Love Trailing Stops• Sophisticated enough to do the trick of cutting  losses and maximizing gains.• Simple enough t...
TradeStops.com
Trailing Stops Only Service
Trailing Stops Only Service
TradeStops.com
TradeStops.com
Alerts can be organized into Portfolios
Email Alert Format
Trailing Stops Only Service
Trailing Stops Only Service
TradeStops Complete – Price Triggers
TradeStops Complete – Time Triggers
TradeStops Complete – MA & Volume Triggers
Benefits of TradeStops.com• Tracks your trailing stops for you.• Can track other alert types for you as well.• Adjusts you...
What about my onlinebroker’s trailing stops?
Online Brokers – TD Ameritrade
Online Brokers – TD AmeritradeTrade Triggers™Trade Triggers are essentially a set of "if/then" rules you craft to instruct...
TradeStops vs. Online Brokers• TradeStops lets you leave an alert active for as  long as you are an account holder. Online...
TradeStops 2.0
TradeStops 2.0 – Main Navigation
TradeStops 2.0 – Alerts Only
TradeStops 2.0 – Alerts by Position
TradeStops 2.0 – Positions Only
TradeStops 2.0 – Closed Positions
TradeStops 2.0 – Closed Positions
TradeStops 2.0 – Closed Positions
TradeStops 2.0 – Portfolio Overview
TradeStops 2.0 – Portfolio Charts
TradeStops 2.0 – Research Charts
TradeStops 2.0 – Position Size Calculator
TradeStops 2.0 – Event History
Conclusions …
How to Lock in Profits on Every Trade?• Learn to cling to your winners!• Use a tool like trailing stops to help you to avo...
Markets Have Risk – We aren’t the only ones!I can calculate the motion of heavenly bodies but not the madness ofpeople.   ...
The Serious Self-Directed Investor
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How to Lock in Profits on Every Trade - Presented by Dr. Richard M. Smith

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How to Lock in Profits on Every Trade - Presented by Dr. Richard M. Smith

Learn the single most important reason that individual investors lose money.

Learn the proven mathematical formula to make bigger and faster gains on every trade you make.

Learn what trailing stops are and how they work.

Learn how to make a plan for tracking your stocks to sell at just the right time.

View case studies of this process in action and the amazing results.

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How to Lock in Profits on Every Trade - Presented by Dr. Richard M. Smith

  1. 1. How to Lock In Profits on Every Trade
  2. 2. Richard M. Smith, PhDB.A. Mathematics University of California at BerkeleyPhD Systems Science Watson School of Engineering, SUNY BinghamtonDoctor of UncertaintyCurrently consulting for Pfizer, J&J, Stansberry Research, Oxford Club, etc.My Investment Career • An inauspicious beginning • The beginning of TradeStops.com
  3. 3. Presentation Objectives• Show you the most important thing that investors can do to improve their returns.• Show you what trailing stops are and how they work.• Show you how TradeStops.com works.• Preview new features in TradeStops 2.0.
  4. 4. Which do you prefer? Bet #1•A: 80% chance to win $4,000; or•B: 100% chance to win $3,000
  5. 5. Which do you prefer? Bet #2•A: 80% chance to lose $4,000; or•B: 100% chance to lose $3,000
  6. 6. Common Obstacles to Success i.e., why you might want to consider something like trailing stops …
  7. 7. Those That Have Gone Before UsThe investor’s chief problem—and even his worst enemy—is likely tobe himself. Benjamin GrahamThere is one important caveat to the notion that we live in a neweconomy, and that is human psychology… which appears essentiallyimmutable. Alan Greenspan
  8. 8. Terrance Odean and Brad Barber Haas School of Business, UC Berkeley http://faculty.haas.berkeley.edu/odean/ Major academic studies on the behavior of individual investors …
  9. 9. Hard Evidence from Barber and Odean• According to a study of 88,000 investors, “people are one and-a-half times more likely to sell a winning stock than a losing stock, and the losing stocks they do cling to under perform the winners they sell by an average of 3.5%.”
  10. 10. Hard Evidence from Barber and Odean• A study of 10,000 investors by the University of California’s Graduate School of Management similarly finds that the two most common mistakes investors make is that they “disproportionately hold onto their losing investments and sell their winners too early.”
  11. 11. Hard Evidence from Barber and Odean• In Nov. 2006, universities from around the world jointly analyzed ALL trading activity on the Taiwan Stock Exchange (TSE) and found that investors are about “twice as likely to sell a stock if they are holding that stock for a gain rather than a loss.”
  12. 12. Barber & Odean (UCB) – Boys will be boysImportant Research Conclusions• “Investors in our studies: • Traded too actively; • Were under-diversified; • Clung to their losers; and •Bought the stocks that happened to grab their attention.”
  13. 13. Barber & Odean (UCB) – Boys will be boysImportant Research Conclusions (cont)• Investors were motivated by: •Overconfidence •the desire to avoid regret, •and the difficulty of evaluating thousands of investment alternatives.
  14. 14. Positive Prospects (Gambles)Prospect #1 • A: 80% chance to win $4,000 • B: 100% chance to win $3,000Expected Value • A: $3,200 • B: $3,000Percentage of individuals that prefer: • A: 20% • B: 80%For gains we want the bird in hand.
  15. 15. Negative Prospects (Gambles)Prospect #2 • A: 80% chance to lose $4,000 • B: 100% chance to lose $3,000Expected Value • A: - $3,200 • B: - $3,000Percentage of individuals that prefer: • A: 92% • B: 8%For losses … we’ll keep two in the bush, thank you.
  16. 16. Prospect Value or Utility Function • We’re more willing to let go of the gains than we are to let go of the losses. • The gains aren’t as important to us. In a strange way, we actually prefer the losses. • So, if we hold two stocks – one a winner and the other a loser – and we need to sell one, which one are we going hold on to? • The loser! • We must reverse this pattern!
  17. 17. What it takes to get even after a big lossPercent fall in share price Percent gain required to get back to break even 10% 11% 20% 25% 50% 100% 75% 300% 90% 900%
  18. 18. The Power of Compounding Interest
  19. 19. Behavioral Finance and Cognitive Biases• The Bandwagon Effect: It must be the right thing to do because everyone else is doing it. Bubble trouble!• Loss Aversion: Prefer avoiding losses more than making gains.• Outcome Bias: Judging a decision by its outcome rather than the quality of the decision at the time that it was made.• Sunken Costs : Money that has already been spent is more valuable than money that may be spent in the future. If I sell at a loss, I’m wasting money. Not!• Recency Bias: Weighting recent data more heavily than earlier experiences.
  20. 20. Behavioral Finance and Cognitive Biases• Anchoring: Rely too heavily on readily available information when making a decision. CNBC anyone?• Belief in the Law of Small Numbers: Making mountains out of molehills.• Endowment Effect: Valuing something more once we own it.• Disconfirmation Bias: Critical of information which contradicts our beliefs while uncritically accepting information that is in line with them. Hear what we want to hear.• Post Purchase Rationalization: If a decision needs to be rationalized after the fact it is probably wrong!
  21. 21. Goldman Sachs 2Q09 Earnings
  22. 22. Houston, We’ve Got a Problem!• We’re biased against selling our losers and holding our winners.• We have other cognitive biases as well.• It’s difficult to recover from losses.• Compounded interest is looking pretty darn good.• Goldman Sachs is taking the other side of our trades.• What’s the solution?!
  23. 23. Trailing StopsThe simplest and most intuitive method for reversing the tendency to hold on to your losers and sell your winners.
  24. 24. Trailing Stop Example – JDS Uniphase
  25. 25. Trailing Stop Example – JDS Uniphase
  26. 26. What is a Trailing Stop• Set a stop-loss a fixed percentage below your initial purchase price. If you bought at $100 and you are using a 25% trailing stop then your stop starts at $75.• Check each evening if the latest close is below your stop or if a new high has been made.• If your stop was penetrated then close the trade.• If a new high was made then adjust the stop. If the new high is $102 then the stop is 0.75 * $102 = $76.50.
  27. 27. Trailing Stops beat professional judgement
  28. 28. Why We Love Trailing Stops• Sophisticated enough to do the trick of cutting losses and maximizing gains.• Simple enough to be understood by all investors. • Understanding gives confidence in heat of a crisis.• Used by world-class investors and traders.• Failure to plan is a plan to fail. You’ve got to have a plan!
  29. 29. TradeStops.com
  30. 30. Trailing Stops Only Service
  31. 31. Trailing Stops Only Service
  32. 32. TradeStops.com
  33. 33. TradeStops.com
  34. 34. Alerts can be organized into Portfolios
  35. 35. Email Alert Format
  36. 36. Trailing Stops Only Service
  37. 37. Trailing Stops Only Service
  38. 38. TradeStops Complete – Price Triggers
  39. 39. TradeStops Complete – Time Triggers
  40. 40. TradeStops Complete – MA & Volume Triggers
  41. 41. Benefits of TradeStops.com• Tracks your trailing stops for you.• Can track other alert types for you as well.• Adjusts your alerts for dividends and splits.• Covers US equities, Canadian equities, London equities, US Mutual Funds, US indices, Foreign indices, Options.• Alerts never expire – can be left open indefinitely.• Stops are never visible to anyone even remotely affiliated with the market makers.• Great things to come …
  42. 42. What about my onlinebroker’s trailing stops?
  43. 43. Online Brokers – TD Ameritrade
  44. 44. Online Brokers – TD AmeritradeTrade Triggers™Trade Triggers are essentially a set of "if/then" rules you craft to instruct TD Ameritrade to automatically enter an order in your account or send you an email alert as soon as a specific market event occurs.
  45. 45. TradeStops vs. Online Brokers• TradeStops lets you leave an alert active for as long as you are an account holder. Online brokers make you cancel them after 60 days.• TradeStops adjusts alerts for dividends and splits. Online brokers cancel alerts after corporate actions.• TradeStops will never execute an order for you.• TradeStops is simple to use.
  46. 46. TradeStops 2.0
  47. 47. TradeStops 2.0 – Main Navigation
  48. 48. TradeStops 2.0 – Alerts Only
  49. 49. TradeStops 2.0 – Alerts by Position
  50. 50. TradeStops 2.0 – Positions Only
  51. 51. TradeStops 2.0 – Closed Positions
  52. 52. TradeStops 2.0 – Closed Positions
  53. 53. TradeStops 2.0 – Closed Positions
  54. 54. TradeStops 2.0 – Portfolio Overview
  55. 55. TradeStops 2.0 – Portfolio Charts
  56. 56. TradeStops 2.0 – Research Charts
  57. 57. TradeStops 2.0 – Position Size Calculator
  58. 58. TradeStops 2.0 – Event History
  59. 59. Conclusions …
  60. 60. How to Lock in Profits on Every Trade?• Learn to cling to your winners!• Use a tool like trailing stops to help you to avoid the tendency to hold losers and sell winners.• Staying in your winners is HUGE. Often it is even more difficult to than cutting your losses.• Have a plan (navigate “the dip”).• Remember that YOU are part of the equation.• Use a service like TradeStops.com!
  61. 61. Markets Have Risk – We aren’t the only ones!I can calculate the motion of heavenly bodies but not the madness ofpeople. Sir Isaac NewtonOur sector concentration is predicated on blackjack and investments.Professional blackjack is being played in this trading room from thestandpoint of risk management, and that ultimately is a big part of oursuccess. Bill GrossThe game of professional investing is intolerably boring andoverexacting to anyone who is entirely exempt from the gamblinginstinct; whilst he who has it must pay to this propensity the appropriatetoll. John Maynard Keynes
  62. 62. The Serious Self-Directed Investor

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