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Risk Management
In order to consistently make money in the current market environment, many investors have come to the conclusion that to be successful they must trade actively.
We agree, but one of the most overlooked aspects of trading stocks is the need for strict risk management controls. WinningStocks.com recommends a four-step process to risk management that will give active traders the ability to maintain profitability in all types of markets. We highly recommend that before acting on any WinningStocks.com investment ideas the investor performs further due diligence and use the following parameters.
Step One:
Buy only high quality companies. |
Buy only companies that are growing not just earnings per share, but revenues as well. By doing this you should insulate the position from large downside moves. While no stock is shielded from a downturn in a bear market, holding only the most fundamentally solid companies will ease the pain of a bad market. |
Step Two:
Buy shares with strong liquidity. |
Buy stocks only with good liquidity. When buying shares in a company the average daily volume should exceed 75,000 shares traded per day. With greater liquidity it easier to move in and out of a stock and the bid/ask spread will not be penalizing. |
Step Three:
Buy only when Institutional money is buying. |
When trading, buy stocks on momentum. The biggest mistake traders and long term investors make is buying stocks on a whim. Individuals should buy stocks only when large institutional money managers have shown an interest in a stock. For example, if $20.00 XYZ shares trade 150,000 shares per day and on a given day it trades 750,000 shares and the shares are driven up to $21.50 this is not a collection of individual investors coincidentally deciding that XYZ is the stock to own. It is money managers and other institutional buyers that are buying large blocks. It does not matter what the catalyst is; it may be strong earnings, management announcing a share buyback, or it may be nothing at all except a large institution deciding that it has to own the shares. |
Step Four:
Cut losses quickly! |
Limit losses on all trades to 8-10%. The common trait among all professional and successful traders is the preservation of capital. Limiting losses does this. When the decision is made to purchase a stock, the investor should have every expectation that it will go up. The problem is that many times the exact opposite happens, and when it does the trader must acknowledge his mistake and protect his capital. Good Generals know when to retreat in order to live to fight another day, traders should do the same. See the WinningStocks.com stop loss table, which illustrates the fact that you can make many stock picking mistakes, and still make decent profits in the market. |
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