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Stock Market Secrets - Discover the Holy Grail of Trading
Eyuephan Celebi
2e7b The Holy Grail of Trading

Unleashing the secrets

Part 1

Hello Dear trader/investor,

what do you do when you have money or have generated money from the Money Machine(www.1stmoneyopportunities.com)?

Whenever you want to buy a stock, trade it or invest in it, you always want to get a stock that performs well. You want a highflyer, a skyshooter. Right?

Well, most of the traders out there try to find the best stocks and after having found them they want to know the best entry point. This entry point is another issue traders are most interested in.

The secret is: You don't need any of these. You don't need to search for the best stock, because you don't know in advance which stock will perform best, you can only guess based on certain criteria you have chosen for yourself.

Finding excellent entry points is something professional traders are least worried about. Some even say that you can choose an entry system based on chance. They know that for succeeding in stock trading other matters are much more important.

These are:

- You: Why do you want to trade?

- Enter: What is your entering signal and what is your concept?

- Protection: When shall you close your trade with a loss?

- Exit: When do you have to exit your trade?

- Position Size: How much of your capital should you invest?

The last point Position Sizing is the most important factor for success and it's the part of the system few people pay attention to.

But first let's just try to explain why the You is very important.

Chapter 1: The You part of the system

Now, don't think that you can just skip this section. I told you that this is a part crucial for your success. You must know yourself before you should begin to trade any market.

What should you know about yourself? You must find clear answers to the following questions:

1. Why do you want to trade or invest?

The answer should not just be to earn money. It must be a little bit more precise. You have to know if you need this extra earned money for survival or if you just want additional money. If the first is the case then you should know that the capital you have must be protected by all means.

2. How much money do you need per year?

If you need 30000$ per year and have 30000$ to invest, then you must make 100% every year to just fulfill your needs. 100% per year is, of course, astronomical. Additionally, this would not give you the chance to increase your initial capital.

3. What are your strengths and weaknesses?

Are you disciplined enough to follow a set trading system (which you will learn in the later chapters) even if it sometimes doesn't show the results you want?

Can you stick to your system without letting yourself get influenced by others or the media? How do you cope with consecutive losses?

4. How much are you expecting to profit annually on a percentage basis?

Do you want to earn 20%, 50% or even 100% per year and…

5. How much risk would you think is bearable to get these profits?

It's quite clear that you cannot expect to win 100% with only accepting a 20% loss probability. A good trading system can show a 100% return with a loss probability of 50%.

But how would you feel if you lost 50% of all your money? Could you endure this easily? Note that you would have to make 100% in order to even up after having lost 50%!

6. How much time can you spend for your trading?

This would deal with the matter of having the possibility to trade (much time) or to invest (less time).

7. What is the highest daily price fluctuation you can stand?

If daily price movements of 10% to the up or down or even higher are too nerve-wracking then you should stay away from small capitalization (cap) stocks and concentrate on mid and big caps (like Microsoft or IBM).

I have reduced the number of questions to 7, but if anything important crosses your mind then write it down and answer it. Take your time in answering these questions, don't just reply to them in your mind, write the answers down.

If you don't want to do it now, ok, but then you shouldn't't begin to enter any market, because knowing yourself is the foundation for your trading system.

Some traders even say that this is half of your trading system, so take it very seriously.

Next, you will learn how to establish an entering signal. As told, this is not as important as the other issues, but nevertheless you must have a setup for that as well.

(Due to a limited amount of allowed space for submitting articles, Part 2,3,4 are left out. If you want to get these, too (free of course), just visit my homepage www.1stmoneyopportunities.com)

Part 5

Chapter 5: Position Size - How much of your capital should you invest?

the introductory question of this chapter lets you know what this topic is about. You must decide on how much you want to invest in one trade.

In principle, you are doing this every time you trade. But you should also know that depending on which kind of position sizing you apply your overall performance will vary dramatically.

I myself was astonished when I first heard that by simply choosing another position sizing model (also called money management or asset allocation) you can change your annual performance from 3.9% to over 20%!

Think about this for a moment. You let everything unchanged (entry, exit, stop) apart from the position sizing alternative and boost your overall profit by 20% per year!

And this is per year, can you imagine what this means in the long run including the compounding matter?

That's why this matter is the Holy Grail, the secret of trading, because you can make long-term gains of millions!

That is possible, because Mr. Ph.D. Van K. Tharp, who has specialized on the issue of position sizing, did a study on this topic and reached this amazing conclusion.

That's why he says that even if all the other elements of trading/investing are chosen by chance you can still make money on stock markets as long as you stick to them and pay the highest attention to position sizing.

What kinds of position sizing models do exist? Let's have a look at three of them:

1. Equal value allocation

This model is quite easy to implement. If you have a 10000$ account you simply decide how many positions you want to allocate to one stock. If you decided on investing in 10 positions then you would have to divide your account value by this position number.

In this case you would allot 1000$ for every stock.

Let's assume one of your stocks is worth 33$. Based on this you would have to buy (1000:33) 30 units of this stock.

Most traders use this kind of position sizing model because of its simplicity but they should likewise be aware that this model delivered the worst annual performance. It is this model which brought 3.9% in annual profits.

2. Fixed Percent Risk-based model

This model is different in so far as it determines the size of your positions based on your maximum risk you set for yourself. This risk is calculated on a percentage basis.

In order to make this more comprehensible consider the following information:

You have 50000$ in your account to trade stocks and you are only willing to accept a risk of 2%. You have set your protective stop for all trades at 10% from your entry price. You have found a stock worth trading/investing. The current price for this stock is 30$. How much of this stock do you have to buy following this position sizing model?

Ok, 2% of 50000$ is 1000$. This number divided by 3$ (10% of 30$) makes 333 shares of this stock. 333*30$ amount to 10000$. Thus, you invest 10000$ in this stock alone!

You think that is too risky? No. As long as you stick to your protective put you will only lose 3$*333=1000$ (plus transaction costs) in the worst case and that corresponds exactly to only 2% of your initial account value.

The whole matter of calculating the position size can be pursued with the aid of a software. Download it here for free(http://www.stator-afm.com/free-money-management-software.html)!

As you have noticed this approach needs the info of your maximum percentage risk and your protective stop. Therefore, you must have determined a concept for yourself beforehand and stick to it.

Are you eager to know how high the performance for this model was on an annual basis? With this model an annual performance slightly above 20% was achieved! Not bad, right?

3. Volatility-based model

This time we determine our position sizes with respect to the daily volatility of the stock. That means the amount of money we allot to a certain stock depends on the degree of risk measured by its volatility. Thus, this amount rises when we want to buy a low risk stock.

One example:

If we take an account value of 50000$ and determine our maximum volatility at 0.5% of our account value we get a number of 250$. The stock we want to buy has a daily price fluctuation of 0.6$ as calculated on the basis of a 10-day average volatility.

In the light of this we have to buy (250$/0.6$) 416 shares. If the current value of this stock is at 30$ we would have to pay (416*30$) 12480$.

If the daily volatility was higher then the amount of shares we had to buy would be lower than 416.

After you bought your shares it is quite crucial to know your stop price. Here it could make sense to take a volatility-based stop system as presented in the earlier chapters.

By the way, this model brought in almost 23% per year. Unfortunately, this model as presented here is not covered in the free position sizing software.

That's all. You now know what The Holy Grail is about. Mostly, it's about position sizing, but as you have seen knowing your stop points is something which is closely knit to position sizing.

The only drawback of following a trading plan in consideration of position sizing model 2 or 3 is that you need a lot of money in order to reduce transaction costs, but that is more a general problem.

If you're curious about other interesting approaches to risk reduction without getting thrown out when your stop is reached and if you wonder how to get instant interest free money and even take part in a game where you can win money then buy Money Machine (www.1stmoneyopportunities.com).