How I made money this week

I'm supposed to be doing homework right now, but who can concentrate on that stuff when they've got stock market stuff to write about? Not me.

My happiest days as a trader are when the overall market is taking it in the shins and I still make money. That's what happened this week and I owe my success to risk management and position sizing. I've been trading differently this year. Instead of mechanically following a stock screen (like I did last year), I am paying attention to a few more aspects in my trading.

Last year, I did very well by unemotionally buying and selling based on one of my stock screens. The screen I used was very simple, and I post the results of that screen every week. The screen was the Punk's Zacks and Zweig screen and it made an impressive +60% last year--not too shabby. It didn't matter what was going on in the general market, I just did what the screen told me to do--no questions asked.

I began the year concentrating on that screen again, but after doing some reading and learning, I decided to vary my approach a bit. I discovered I was risking way too much on each trade. Last summer I had my WHOLE PORTFOLIO in one stock for a month (Sothebys BID)! I made over 16% that month, but I had no idea how risky (and stupid) I was being (even with a 25% stop).

Basically, I employed two important concepts that saved me from getting slapped around this week. 1) I refused to risk more than 1% of my portfolio value on any one trade. I stopped out of nearly every stock I owned by Wednesday, but I held on to one stock that refused to go down (VSEC). 2) I didn't allow VSEC's position size to get too out of hand by following it with a stop that wouldn't risk more than 1% of my portfolio. VSEC has gained 57% since I've bought it, so I had to be careful to keep it under control--especially during the rapid losses we saw this week.

The first five months of this year were very frustrating for me (as you can read in previous posts). My dumb screens were kicking sand in my face as I managed my risk and got all protective of my equity. But this week my patience paid off as my returns blew by most of the screens.

I think most traders focus on picking the right stocks (as I have in the past). But a huge part of making big returns comes from how you manage those picks. I'm learning that blindly trading my screens puts me at too much risk for a big loss that will shut me down as a trader.

I highly recommend Van K. Tharp's book Trade Your Way to Financial Freedom if you are interested in learning some ways to better your trading through risk management and position sizing. Here's some free information on position sizing.