Trailing Stops and Position Sizing Webinar


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Trailing Stops and Position Sizing
Presented by Dr. Richard M. Smith
The bad news is, most individual investors fail to realize the full potential of managing their own investments.
The good news is, there is a very simple reason why. More than any other single factor, individual investors are hampered by the tendency to hold onto losers too long and sell winners too early.
Trailing stops and position sizing are two very easy-to-understand tools that can have a huge impact on your investing success. They can literally be the difference between success and failure.

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  • Don’t get over-committed … don’t “need” the money.Have a plan … “navigate the dip” … put yourself in the minority
  • Trailing Stops and Position Sizing Webinar

    1. 1. Trailing Stops and Position SizingTwo simple tools with powerful benefits
    2. 2. What’s the Big Idea?1. Novice investors prefer to lose money.2. To succeed you must have a plan and conviction.3. Trailing stops and position sizing are simple and easy to understand tools that you can use to improve your returns.
    3. 3. Richard M. Smith, PhDPhD Systems Science Interdisciplinary studies in math and computingDoctor of UncertaintyRight Way Trader TradeStops, Right Way Charts, Seasonal TraderCurrently consulting for Pfizer, J&J, Stansberry Research, Oxford Club, etc.
    4. 4. What I Hope to Accomplish Today• Plant a seed for your consideration.• Show you what trailing stops are and how they work.• Show what Position Sizing is and how it works.• Show you how works.
    5. 5. Question 1•A: 80% chance to win $4,000; or•B: 100% chance to win $3,000
    6. 6. Question 2•A: 80% chance to lose $4,000; or•B: 100% chance to lose $3,000
    7. 7. We’ve met the enemy, And …
    8. 8. Investing and Trading … This is Personal!• “I’ll get out when it gets back to …”• “Because I’m going to buy it”• “I have to wait a year to make 100%?”• Adding to my winners
    9. 9. 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
    10. 10. Terrance Odean and Brad Barber Haas School of Business, UC Berkeley Major academic studies on the behavior of individual investors …
    11. 11. 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%.”
    12. 12. 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.”
    13. 13. 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.”
    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. Trailing StopsThe simplest and most intuitive method for reversing the tendency to hold on to your losers and sell your winners.
    18. 18. Trailing Stop Example – JDS Uniphase
    19. 19. Trailing Stop Example – JDS Uniphase
    20. 20. 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 now $76.50 (25% below $102).
    21. 21. Trailing Stops beat professional judgement
    22. 22. Trailing Stops beat professional judgement
    23. 23. Trailing Stops beat professional judgement
    24. 24. Trailing Stops beat professional judgement
    25. 25. Trailing Stops beat professional judgement
    26. 26. Trailing Stops beat professional judgement
    27. 27. 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!
    28. 28. Position Sizing Staying calm and collected in volatile situations
    29. 29. Position Sizing … The Basics• How much of our investable capital are we willing to risk on this idea?• Conservative investors will risk a half to two percent. Risk takers might risk up to 5%.• If we’re going to limit our risk then we have to know what our exit strategy is, right?• Capital at risk + exit strategy  Position Size
    30. 30. TradeStops 2.0 – Position Size Calculator
    31. 31. TradeStops 2.0 – Position Size Calculator
    32. 32. TradeStops 2.0 – Position Size Calculator
    33. 33. TradeStops 2.0 – Position Size Calculator
    34. 34. TradeStops 2.0 – Position Size Calculator
    35. 35. TradeStops 2.0 – Position Size Calculator
    36. 36. Position Sizing … The Advantages• Protection of capital • Opportunity is infinite. Capital is finite.• Clarity of intent• Calm amidst the storm• Not blowing up your account or being gun shy for the next opportunity.• Having a plan!
    37. 37. TradeStops 2.0
    38. 38. Benefits of• 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 …
    39. 39. 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 easy to use.
    40. 40. Summing Up …
    41. 41. Learning to take “Irrational Profits”• Cling to your winners! • Even more challenging than selling losers.• Don’t get over-committed.• Have a plan and conviction.• Put yourself in the minority or market players• Remember that YOU are part of the equation.• Use trailing stops and position sizing.• Subscribe to!
    42. 42. 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 Gross
    43. 43. The Serious Self-Directed Investor
    44. 44. Special Offer!!!•• $39.95 for a full year of up to 50 simultaneous trailing stop alerts.• 30 day no-questions money back guarantee.• Portfolio tracking, position sizing, charts.• US equities, indices and funds; London and Canadian equities; Options (extra fee)• More to come!