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Greetings, fellow Pro-fundity team members - 02-04-05.
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Today’s guidepost, albeit lengthy, will take you to heights well worth the time spent. This is the first of a series of tutorials on the use of and profit from Sell Point, a new program you will find no-where else but as a member of Pro-fundity.
Let me begin with today’s Tip of the Day;
Brad Koteshwar - “The Perfect Stock”
Sound advice, but let me add another quote from Koteshwar’s book;
The importance of these two quotes lies in the absolute obligation of a trader, to himself, to accept bad position-messages quickly and “Cut his losses SHORT!” A small exercise in trade management. The first quote is self-explanatory. The second, not so obvious, a message on “likelihood’s.” In the colloquial, “Stacking the Odds!” Since even the most successful investors have losses, they exercise rigid discipline in their exit strategies to remain winners. What follows is our answer to this critical issue, a strategy to “Stack the Odds” in our favor.
It is always tougher to get out of a position than to get in. As we pick stocks to buy we have thousands of choices. We can design creative methods with many options to narrow our choice. However, to exit we have but one stock to deal with. With so few options, we believe the exit decision can best be left to mechanics. That is, remove emotion from the task and let price-action pull the trigger. Entry, on the other hand, requires the best judgment and creativity we can offer.
There are a multitude of stop-strategies, but they all begin with a decision made when the position is entered; how far below the buy-point must the price go before we cut the loss. That must be an immediate decision! Two orders must be made, the buy order and the stop-loss, as soon as the order is confirmed. And this is where the many stop-strategies begin.
Two general categories can be used for setting the stop point:
- Some fixed percentage below the buy point (this can be tied to the volatility of the price pattern or simply a fixed percentage, e.g., 6% - 12%).
- A point on the chart pattern, where price has seen support in the recent past. Support likely occurs near the same level going forward, unless a change in character drops through previous support. A stop just under previous support provides some protection from erratic price decreases, allowing the stock to realize real price increases. If the price violates this support level, its best to get out, regardless of how good the stock appears otherwise.
In either case, the initial stop point can be moved higher as price (and profit) increase, to satisfy the second critical adage, “Let your Profits Run!” Money is made in the market by minimizing losses and maximizing wins. The Holy Grail we all seek in the market rests on these two simple Money Management principles.
The importance of placing the stop order when the initial order is placed is one of practicality. Whenever we make a buy decision, we expect to win, to make money. If it goes against us we can hope it will turn back up. That is the death-knell of market success. To avoid this ever-present and oft-exercised novice activity, we let the mechanics of our stop order save the day. It’s out of our hands! As any successful market trader will testify, the biggest problem they’ve all had to face is themselves, spending too much time trying to beat the market and too little time on their own weaknesses. These same successful traders will add that many of their stock picks were losers. Their success came from “cutting their losses short and letting their winners run!”
Cutting losses is essential. The hardest lesson to learn is that we’re not going to be right all the time. If we don’t cut every loss quickly, sooner than later we’ll suffer some very large losses. The reason this is hard is that when we do cut a loss, often the stock will turn around and go back up in price. Then we doubt our wisdom, conclude we were wrong and the stop-loss policy is bad. Many novice investors get confused here. The stop is a fire insurance policy, one we don’t feel bad about paying for even if our house doesn’t burn down. We buy insurance to protect ourselves against the remote possibility we could suffer a major loss that would be tough to recover. That’s what we do when we cut a loss short. For example, if we let a stock drop 50% from where we bought it, we have to make 100% on the next trade just to break even. What’s the chance of a stock doubling in price?
With that introduction, let me introduce “Sell Point,” a stop-loss technique that allows you to:
- Leave the sell decision to the program.
- Conduct your trading at home in the evening without watching the vagaries of daily price action.
- Exercise trading skills and market knowledge in the selection of tickers to trade.
- Return a profit well ahead of the market when exercised properly.
First, the stop-strategy is based on a tip offered by Don Worden (TC2000/TCNet founder) many years ago:
Fig. 1. Worden relationship.
We’ve programmed this relationship into Sell-Point to execute stops that maintain the profit gained, while getting us out of losing positions. Let’s look at an example:
Fig. 2. Berry Petroleum, BRY, daily price chart.
Look at the next graphic to see how we managed this entry with Sell-Point. What you see is part of the Excel spread-sheet where data must be entered. The green cells are required entries for the management. First, how much do we invest? In this case we committed $1,000. Our commission is the next entry, at $7.00. The next two cells deal with our market skill in identifying both an initial stop and target value. These are necessary for a couple of reasons. First, the stop is what we’ve been talking about. At the same time we place the buy order, we decide when we’ll bail-out. In this case, we chose $37 which is below the last support. Since this stock is in a good trend, a price below the last support would likely signal a change in character.
Fig. 3. Sell-Point entry set-up.
Now, why is it important to choose a target? Of course, we don’t know where it will go. Given the current trend, we make a best-guess, in this case $48. Having done that, the next step is to enter the closing data for the day, seven cells, which identify how the price/volume looked as we place the order that evening. The closing price becomes what we pay for this entry. (We may adjust this buy price when we see where we fill the next morning) At any rate, having entered the stop, target, and buy price (close), Sell-Point calculates the Reward/Risk ratio, in this case, 2.14. Different traders have different cutoff points for this ratio, but 2 is often required to further help stack the odds in our favor. This exercise forces us to address this ratio. We may back clear out of the trade at this time if we see the odds out of favor. Not so in this example. Moving ahead to the current date to see how the stock fared, the next chart carries us to near the end of January.
Fig. 4. Current price chart for BRY.
The marker identifies the entry date of 11/05/04 with a healthy increase. Let’s see how Sell-Point dealt with this rise. What you see in this graphic is a larger view of the Sell-Point spreadsheet, where daily price/volume data has been entered. The charts to the right are automatically created as the data is entered, for information only. These should not replace your own chart program used to guide your technical analysis and decision process.
Fig. 5. Sell-Point spreadsheet for BRY.
Notice, we got a sell signal on 12/2/04, but what did that mean? Look at the next graphic which magnifies the spreadsheet a bit to understand. Each day the data was entered, the Sell-Stop column recorded a new sell point, based on the day’s price action. Notice it didn’t change until 11/15/04, when it increased from the initial $37.00 to $38.11. That means the price had increased sufficiently for the stop to move up. The program calculated that for us. Our task on that evening was to change the stop order with our broker to this new value. The program does its part, we must do our part.
Fig. 6. Magnified spreadsheet for BRY.
As data moves down the table, we’re forced to look at the Sell-Stop at each days-end and make changes when necessary. That sets us up for the following trading day. In this example, on 12/1/04, we raised the stop at the end of the day to $43.70. The next day the low price fell below that sell-stop and we sold at that level. That is, the previous day’s stop. The Sell Stop value of $46.44, shown on 12/2/04, is what we would have changed to had we not been stopped-out.
The transaction is summarized at the top of the chart, showing the percent price increase and actually how much of that increase we captured after costs and slippage. The first graphic shows a 6.4% dollar return having invested $1,000 in the trade. Had we invested $10,000 instead (simply change the Total Out cell entry), the second graphic shows our dollar return increases to 7.8%.
Fig. 7. Summary with $1,000 invested.
Fig. 8. Summary with $10,000 invested.
BRY was but one of four tickers we put into this portfolio. Lets see the other three in brief and how its all summarized (managed) as a complete portfolio. The second ticker is WCC, with results shown in what follows, entering on 10/29/04:
Fig. 9. Wesco International Inc., WCC, daily price chart.
As a point of interest, before we cavalierly jump into a position, we punch the number 5 on our charting program (TCNet) to see what a weekly (5-day) chart looks like, as shown below. It is important to always look at different time frames to understand the character of the price pattern. The strength of the trend is more obvious from this view.
Fig. 10. Wesco International Inc., WCC, daily price chart.
Having confirmed our aspirations for this stock, we take the next step and go to the entry setup:
Fig. 11. Sell-Point entry set-up for WCC.
A current chart shows where the price went, with results in the Summary.
Fig. 12. Current price chart and summary for WCC.
Our third pick in this portfolio is shown next, with the current chart and summary, showing a loss.
Fig. 13. Current price chart and summary for UCI.
Hang on, we’re nearing the end (and it will be worth it!). The last ticker in the portfolio is WWCA, shown with an entry on 11/26/04 and the resulting chart. The summary follows showing an important distinction.
Fig. 14. Current price chart and summary for WWCI.
The distinction in this case is we haven’t been stopped out yet, the ticker is still alive as of the last day recorded. Notice how the SELL dropped below the last date, so the sell price in the summary is the close on the last day.
We’ve covered the four tickers in our portfolio individually. Now this where it starts to get good! Look at the bottom of any of the spreadsheets to see the worksheet-Tabs:
Fig. 15. Current price chart and summary for WWCI.
There are 11 tabs (sheets), count them. That means in this program there are eleven separate worksheets, each with an important function. The first 10 are Sell-Point trade worksheets as you’ve seen on the previous examples. You can have as many as 10 tickers in your portfolio simultaneously. We used only four in this example. The 11th worksheet is a Portfolio Summary, where you can track performance individually or as a group. The next table is the Portfolio Summary Sheet, summarizing performance.
Fig. 16. Portolio Summary sheet for our 4-ticker example.
Another feature on Sell-Point to watch for. When you have only a few days entered, the chart will have a few candles across the frame. To make the chart easier to read, you can change its size by clicking inside the chart border, then grabbing and dragging the right edge left or right.
Fig. 17. Adjusting chart size.
Finally, the rich value of Sell-Point lies in our ability to not only track live trades daily, but to back-test groups of stocks over different time segments. The following Summary Sheet is the result of testing the ten main picks on 11/19/04. Assuming we bought all ten tickers on that Friday, here is what happened.
Fig. 18. Summary sheet for Main Picks - 11/19/04.
I apologize for the length of this Guidepost, but feel the rewards justify the effort. When you download Sell-Point from the Pro-fundity page, save it as a reference boiler-plate where it won’t be compromised. As you test or enter trade price data, name each effort singly and save for future reference. Always keep a clean Sell-Point in the wings. We will discuss the other side of the equation, entries, in future GP’s. We’re often asked if the weekly picks are buy candidates. Our response has always been NO, they are potential candidates but require the scrutiny of each individual trader. We’ll show you what we look for among the 30 picks each week.
Main Picks - BMHC,CACH,DHB,FCF,HRP,MECA,OFC,SCR-A,TKC,USV
Breakout Picks - BHS,BKS,CTR,DDE,JOYG,KNX,SFD,SYNA,TLM,VTIV
Quick Picks - CZR,DSY,IPAS,JBLU,MRGE,NCRX,NFLD,NRI,OVRL,TER
100 Optionable Picks
= Tickers in comma separated format for use in personal tools, such as TC2000.
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