StockPunk Readers

I continually am impressed with the quality of folks who peruse this dumb blog. What are you people thinking? Don't you know I don't really have a clue about what I'm doing?

When people go back and read my previous posts they often become confused about my strategy. There's a good reason for that--I change my strategy often. I don't change it because I'm so smart. I change it because I still am trying to figure this whole thing out (and I have a LONG way to go).

Shaun had the misfortune of wanting to figure out my philosophy and strategy, so he went back and read all of my posts over the past year. He became even more confused (who wouldn't) so he wrote me. He gave me permission to post some of the questions and answers that we went through and I thought it would help the other two people who read this blog (Shaun's questions are in blue):

I'd be happy to answer your question. I think the reason that you are confused about what I do is because I am confusing about what I do. This has been a learning process for me, and I am by no means any sort of expert. I've kind of stumbled into the type of trading I do after taking bits and pieces from experience, books, and blogs.

I've been all over the place in my trading as I've learned new things. Some things have worked very well so I continue using them. Some things were ridiculous, so I quit (probably not soon enough).

I've totally changed the way I trade recently after really starting to understand the concepts of risk and money management. Until recently, I thought trading was all about picking the right stock. This is a gut wrenching game because I had to pick the right stock (usually from a basket of stocks like the Zweig screen). Then I had to buy it at a good price. I struggled getting in at good prices on Monday morning which was always frustrating. Then I needed to figure out how long to hold the stock. Sometimes I'd have a stop, other times I didn't. Sometimes I'd sell the stock unemotionally when it dropped of the Zweig screen. Sometimes I wouldn't sell hoping to squeeze a few more percent out of the stock.

The mechanical approach I had served me well for a couple of years. I think it's a great approach to learn the mechanics of trading. It takes very little time and effort and it can help to manage the emotions of trading (I still struggled with the emotional thing).

But I now think that money and risk management is the key to staying in this game long term and I think that I can really boost my returns and avoid unnecessary risk by utilizing those management tools in my trading.

Currently I am trading stocks in a few different systems. I still use the Zweig screen, but I am also using some technical indicators to make additional trades. I am pretty new to technical analysis, but I am starting to see its value in my trading "package".

>>>In one comment a guy asked what you did with cash since you said you only risked 2% on a trade and wanted to hold 5-10 stocks. You said the rest was in cash. Is that right? If you had a $100,000 account and there were 5 stocks you liked, would you be investing 2% of 100,000 into the 5 stocks, so $10,000 invested and $90,000 in cash? Did I read it right?

The whole risk and position size thing seems simple, but it has taken me over a year to get it figured out. I've probably written some confusing things over the past year as I tried to get things figured out. Here's how it works.

The least complicated way of using a position size with the Zweig screen would look like this. I've got 5 stocks that qualify. I've got $100,000. I determine that I want risk only 1% of that $100,000 on any one trade (a good rule of thumb). That means I RISK $1,000. I determine that a 10% stop works best for my system. So I can buy $10,000 worth of stock with a 10% stop on each one. 5 X $10,000 means $50,000 in positions and $5,000 risked.

>>>>I have been thinking of risking 2% of the account per trade, but saw it as setting a stop that would be 2%*100,000=$2,000 loss max on each of 5 positions. So I'd buy $20,000 in each of the 5 stocks picked, at set price stops for $2,000, which is 10% of the position. What do you think of this method? (I am going to work through the Chris Perunna links that you posted and I plan to read the Van Tharp book that you recommended.)


You’ve got the idea! I recommend you read the Van Tharp book—it’s excellent and thought provoking. I learned a lot more about stop setting and now I’m using a volatility stop rather than a set amount like 10%. It’s less gut wrenching because it seems to have mathematical value.

>>>>>Have you refined your 'volatility system' for taking profits mentioned on October 6th, 2007?

The volatility system was a spreadsheet developed by Henry Ford at Pitbull Investor (I subscribe). It’s a great tool. I also use Average True Range (you can find that out on a StockChart). I use 14 periods and times the result by 2.5 to give me a number that I use for stops.

>>>>What is the "To The Moon" screen? Did I miss its description or is it secret sauce? You mentioned that it relies on Zacks metrics that you will not be able to screen for if you do not renew Research Wizard. Could you use AAII and Zacks Premium to replicate it?

To the Moon incorporates Zacks screens of my creation and elements from the Zweig screen. I really haven’t bought any stocks on that screen for some time because I know that I won’t be renewing my subscription. I’m going to let it die this summer.

>>>Has your view of Zack's Research Wizard changed at all? Last I heard you were not impressed with it, particularly the client service. Maybe the way to go is do a trial once a year?

I’m moving a different direction. I still like the screener, but I want to focus more on technical analysis. I’ll still subscribe to Zacks to get the Zacks number (I think it is a powerful qualifier), but I don’t plan to renew RW.

>>>>I enjoy reading the blog of someone who has trail blazed the path I have set ahead for myself. My results lately on discretionary trading are terrible, so mechanical investing is my future. Now I have to steel myself to dump some losing positions that I hoped would come back, but have learned that hope is a lousy hedge.

I’m glad my dumb blog has kept your interest. Thanks for your contributions! It makes things much more interesting. My goal was to provide a place to put down my thoughts and a place where I could get some feedback on what I was doing. I’ve learned a ton in the last year, but I still have a long way to go.

I think I just got lucky. If I had lost money from the get-go I would have quit doing this a long time ago. Hang in there! Trading is extremely rewarding and fun. You’ll find your grove and things will take off. Just keep learning as much as you can. Turn of the news.

The best thing that I came away with from Van Tharp’s book is that trading stocks is a probability game. Probability and emotions don’t mix, so you need to have a system that takes your emotions completely out of your trading. Otherwise you bias your trading and create all sorts of problems.