Towards the end of April (4/22/10 to be exact) I started trading in a new retirement portfolio with OptionsHouse. Since it launched my portfolio is up +.79% versus the S&P 500 which is down -10.35% over the same period.
What makes this feat even sweeter is that Ive only had 4 winning trades out of 19, effectively leaving me with a batting average of .211% (1 out of 5).
So how is this possible? By cutting losses very tight and maximizing winners I am able to walk away with a profit even though I am losing or breaking even much more than I am winning.
Beating your benchmark index by over 11% while only winning 21% of the time is not a “luck of the draw” matter. Staying extremely disciplined and following rules helps you get there. For this volatile, crummy, frustrating market there have been 8 big keys to my successful trading:
- Keep atleast 50% of your portfolio in cash. The majority of time I have been in 100% cash simply because this market is so difficult to navigate. Cash is a real position like any individual stock so don’t be afraid to use it.
- Use tight stop losses. During a regular bull market using loose stop losses of 5 – 8% are a regular occurrence but with today’s market 2 – 5% is what I use and recommend. Most investors have differing opinions on stop losses; I personally love them for 6 reasons.
- Focus on a strict profit vs loss ratio to determine picks. There are many ways to setup a good profit vs loss ratio, and for me personally I always go for a 1:5 setup. This means that for whatever I want to risk on the downside, say $1 for example, then I must foresee atleast $5 of upside potential to even consider taking a position.
- Be patient. Just like a poker player playing waiting for a big hand to bet heavy, in this current market it is critical to stay patient and wait for the right setup. It can be tough going a week or more without a single trade, but most often there is a good reason to stay away. Do not buy unless you know based on your research that you have favorable odds for success.
- Stick to your game. The current market environment is no time to try a new “fresh” strategy for the first time. Even if you know your current strategy isn’t proving profitable any longer, take a step back, move to cash, then utilize a stock simulator to practice. Many online brokers offer them for free.
- Don’t be afraid to lock in profits. I would be up even more than .79% if I did a better job of taking profits. This doesn’t have to be done by selling a full position either; even selling 50% of a position can be a smart play. In this market reversals are so common that you almost have to expect that standard breakouts are going to reverse.
- Stay disciplined. This filters into all the above keys and is absolutely critical. All it takes is one time to not follow a rule and a simple trade can turn into a blood bath for your portfolio.
- Continuously refine your strategy and adapt. I still recall the days when even a flat 1% move for the market was a BIG deal. Today’s market is littered with heavy price volatile sessions of 2% or more. Because of this one of my newest strategies is to always bump up my stops to atleast break even once I am up as little as 1% on a position. This refinement has helped me minimize losses significantly from reversals.
The most profitable stock (out of 4 winners) I’ve traded since I started with this portfolio in late May was just recently when Potash (POT) broke out of a nice consolidation on heavy volume after earnings were posted. I nabbed my shares right near the morning low at $97.92 and the stock took off. I ended up selling around $105 for a 7% return (nearly 12x my original $.60 of downside risk). The stock has since continued to run and today closed at $112.04.
The reason I am writing this post tonight is not to brag or boast about my success in the market (there are testimonials for that sort of thing). I want all 11,000+ of you RSS subscribers to really know that this current market can be beaten. With dedication and a lot of discipline there is no doubt in mind you can do it.
If you need brushing up on specific strategies or market concepts please check out the stock education area of the site. There are hundreds of great articles there to be read for free. And for those who do not yet receive my analysis, sign up and join the thousands of other subscribers today (option 3 is the daily email).
Stay frosty out there 😎 .