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.

1. Trailing Stops and Position Sizing
Two simple tools with powerful benefits

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. Richard M. Smith, PhD
PhD Systems Science
Interdisciplinary studies in math and computing
Doctor of Uncertainty
Right Way Trader
TradeStops, Right Way Charts, Seasonal Trader
Currently consulting for Pfizer, J&J, Stansberry
Research, Oxford Club, etc.

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 TradeStops.com works.

5. Question 1
•A: 80% chance to win $4,000; or
•B: 100% chance to win $3,000

6. Question 2
•A: 80% chance to lose $4,000; or
•B: 100% chance to lose $3,000

7. We’ve met the enemy,
And …

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. Those That Have Gone Before Us
The investor’s chief problem—and even his worst enemy—is likely to
be himself.
Benjamin Graham
There is one important caveat to the notion that we live in a new
economy, and that is human psychology… which appears essentially
immutable.
Alan Greenspan

10. 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 …

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. 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. 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. Positive Prospects (Gambles)
Prospect #1
• A: 80% chance to win $4,000
• B: 100% chance to win $3,000
Expected Value
• A: $3,200
• B: $3,000
Percentage of individuals that prefer:
• A: 20%
• B: 80%
For gains we want the bird in hand.

15. Negative Prospects (Gambles)
Prospect #2
• A: 80% chance to lose $4,000
• B: 100% chance to lose $3,000
Expected Value
• A: - $3,200
• B: - $3,000
Percentage of individuals that prefer:
• A: 92%
• B: 8%
For losses … we’ll keep two in the bush, thank you.

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. Trailing Stops
The simplest and most intuitive method for
reversing the tendency to hold on to your
losers and sell your winners.

18. Trailing Stop Example – JDS Uniphase

19. Trailing Stop Example – JDS Uniphase

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. Trailing Stops beat professional judgement

22. Trailing Stops beat professional judgement

23. Trailing Stops beat professional judgement

24. Trailing Stops beat professional judgement

25. Trailing Stops beat professional judgement

26. Trailing Stops beat professional judgement

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. Position Sizing
Staying calm and collected
in volatile situations

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. TradeStops 2.0 – Position Size Calculator

31. TradeStops 2.0 – Position Size Calculator

32. TradeStops 2.0 – Position Size Calculator

33. TradeStops 2.0 – Position Size Calculator

34. TradeStops 2.0 – Position Size Calculator

35. TradeStops 2.0 – Position Size Calculator

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. TradeStops 2.0

38. 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 …

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. Summing Up …

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 TradeStops.com!

42. Markets Have Risk – We aren’t the only ones!
I can calculate the motion of heavenly bodies but not the madness of
people.
Sir Isaac Newton
Our sector concentration is predicated on blackjack and investments.
Professional blackjack is being played in this trading room from the
standpoint of risk management, and that ultimately is a big part of our
success.
Bill Gross

43. The Serious Self-Directed Investor

44. Special Offer!!!
• tradestops.com/special-offer/ts004/subscribe
• $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!