Targeting the ‘goldilocks zone’
Tuesday, 31 October 2017
By Bernd Struben
- The data revolution
- Most Traders Get This Question Wrong
- Not too early, not too late
- Don’t make this mistake
‘You’ve got to know when to hold ’em. Know when to fold ’em. Know when to walk away. And know when to run.’
We’ll kick off today with a hypothetical scenario. Don’t worry. It’s a happy one.
Let’s say you invested $1,000 in a promising stock earlier this year. We’ll call it Widget Co.
Widget Co was already in a strong uptrend when it hit your radar. The share price was up 9% in just two weeks when you bought it.
But that didn’t concern you.
As we covered in yesterday’s Port Phillip Insider, buying into strength is one of the strategies quant trading legend, Jason McIntosh, swears by. It’s also one of the strategies that allowed him to comfortably retire from the corporate world 10 years ago, at the age of only 37.
In the case of Widget Co, the strategy paid off. The stock soars. After three months you’re looking at paper gains of 100%.
Now here’s the question. How do you decide when it’s time to sell?
Some traders might take this opportunity to sell half of their shares. That would see them recouping their initial $1,000 investment, leaving the $1,000 of paper profits invested in the stock.
Other traders might sell out entirely. Happy to have doubled their money, they may look for the next big opportunity.
According to Jason McIntosh, neither of these are the winning strategy over the long haul. He explains why in today’s guest essay below.
Jason goes into much greater detail of how he narrows down which stocks to buy, when to buy them and how he knows when it’s time to fold ‘em in a special six-day, online video training course.
The course is free to any paid subscriber of Port Phillip Publishing. The first of the six-part series commences this Friday, 3 November. If you haven’t done so already, you can register here.
Now let’s have a look at the latest market action.
Overnight, the Dow Jones Industrial Average closed down 85.45points, or 0.36%.
The S&P 500 fell 8.24 points, or 0.32%.
In Europe, the Euro Stoxx 50 index finished up 9.95 points, or 0.27%. Meanwhile, the FTSE 100 dropped 0.23%, and Germany’s DAX index gained 12.03 points, or 0.09%.
In Asian markets, Japan’s Nikkei 225 index is down 62.62 points, or 0.29%. And China’s CSI 300 is down 0.35%.
In Australia, the S&P/ASX 200 is down 0.90 points, or 0.02%.
On the commodities markets, West Texas Intermediate crude oil is US$54.07 per barrel. Brent crude is US$60.90 per barrel.
Gold is trading for US$1,276.66 (AU$1,658.43) per troy ounce. Silver is US$16.85 (AU$21.89) per troy ounce.
One bitcoin is worth US$6,142.36.
The Aussie dollar is worth 76.98 US cents.
The data revolution
Today, the world produces and analyses more data in one day than we did in the entire 19th Century.
And with the coming Internet of Things, this trend is only speeding up.
This isn’t just an exercise in navel-gazing. There’s big money in all this data. And Australia’s Big Four banks are getting swept up in the data revolution. Albeit reluctantly.
As The Sydney Morning Herald reports, ‘Data revolution to transform four pillars model’:
‘Governments around the world, including Australia, are pushing banks to open up some of the most valuable vaults they have: those storing customer data.
‘Through “open banking”, policymakers want to allow consumers to securely and easily share their financial data with trusted parties such as banks, financial technology firms, or potentially tech giants like Facebook.
‘The United Kingdom and Europe are already going down this path, and Treasurer Scott Morrison has ordered a review into open banking, to be provided by the end of this year.
‘ANZ Bank’s chief data officer, Emma Gray, sketches scenarios similar to the one above as “simplistic” examples of what might take place in an “open banking” regime.
‘Typical of the major banks, Gray argues for a gradual approach to open banking.’
The major banks may want to take a ‘gradual approach’, but the data revolution is moving at speeds well beyond gradual. You can expect the banks to keep dragging their heels, but at the end of the day they’ll have little choice but to get aboard with open banking.
Taking into account Australia’s $1.6 trillion in mortgage debt, this could have a massive impact on homeowners and lenders alike. It could also see early investors in nimbler, tech-based fintech companies pocket huge gains.
This is precisely why small-cap analyst, Ryan Dinse spent the past three months immersed in blockchain technology. The distributed ledger technology can enable exactly the type of secure data sharing required for open banking.
Tomorrow, 1 November, blockchain is set to take another leap forward in what Ryan calls ‘the blockchain collision’. And a few, well-positioned small-cap stocks could see their share prices rocket.
Now read on as trading guru Jason McIntosh explains what most traders get wrong. Don’t let it be you…
Most Traders Get This Question Wrong
Jason McIntosh, Editor, Quant Trader
Think of a great party you’ve been to…
All your best friends are there. Your favourite music is playing. And you’re enjoying a drink or two.
Now, answer this:
When’s the perfect time to go home?
For many, the ideal time to leave can be elusive.
Sometimes you leave too early and miss the best part. Other times you stay too long and pay the price the next day. Getting it just right can be a hard tightrope to walk.
The ‘Goldilocks Principle’ says the best result is between two extremes. The trick is to strike a balance. It’s about finding the point that maximises your benefit and minimises your downside.
Well, that’s the theory.
How do you manage this in real-time?
I’ll answer this in a minute.
But first, I have an email to show you:
‘I’ve only been subscribing to Quant Trader for around six months so I realise it’s early days in terms of results, but I was wondering about when to sell at a profit.
‘I understand exit stops. But, for example, I bought A2 Milk Company Ltd [ASX:A2M] at $2.70 a share in March and $3.27 in April and, as of today, have clocked up a tidy 96% profit.
‘How will I know I should sell or hold such a stock?’
This is an excellent question. Choosing when to sell is a key trading decision.
And just like your favourite party, knowing when to ‘call it a night’ can be tricky.
You see, many traders eagerly lock in small gains. They never hang around long enough for a stock to really get going.
Others hold on to a great trade too long. These people stay on well after a stock reaches a high. I’ve seen many traders give back big gains this way.
So what’s the solution?
Well, let’s look at that now.
Not too early, not too late
David’s question involves a trade from Quant Trader’s portfolio: A2M.
This stock has been doing well. The initial entry was at $2.29 on 28 November 2016. There were extra signals at $2.72 and $3.27. The respective gains so far are 210%, 161%, and 117%.
I understand where David’s coming from. He has a good profit and wonders what to do next.
Let me ask you this: Apart from buying, what has David done to get this far?
The answer is simple…
He’s done what I believe every trader should do — resisted the urge to bank a profit.
You see, no one knows how far a trend will go. Some run a very long way — further than just about anyone expects. It doesn’t take many of these to really boost your returns.
The trick is to know when to eventually sell.
Quant Trader has a plan for this. It’s called a trailing stop. The aim of this strategy is to maximise your upside, while minimising the risk of holding on too long.
Here’s an example of what I mean:
This example is from Quant Trader’s live signals. It shows a series of trades in Vita Group Ltd [ASX:VTG].
Quant Trader’s initial signal was at $1.28. There were two extra signals at $1.42 and $1.76. The eventual exit locked in respective gains of 199%, 169% and 117%.
Now, look closely at the red line below the share price. This is the trailing stop. It helps ensure you don’t stay in a trade too long. The party is over when the shares touch this level.
People sometimes tell me that the trailing stop is always late to sell. And they’re right. Vita Group’s peak was at $5.10. Quant Trader’s exit was 24.9% lower, at $3.83.
And that’s OK.
I believe it’s better to sell a bit late than way too early.
The reason Quant Trader got a 199% gain is because it was late to sell.
Letting a position run involves taking a risk. It means accepting that you’ll never get the best possible price. Inevitably, you’re going to give back some of your gains.
There’s no way around this if you want to profit from big trends. The 100%-plus winners — like Vita Group — are the reward for taking that risk.
Don’t make this mistake
But not everyone wants to listen.
Some people tell me it’s better to use a tight trailing stop. They believe this helps them exit closer to the top. This sounds good in theory, but it’s rarely that simple.
Setting the trailing stop too close creates a new problem. It typically results in a stock hitting its exit point sooner. This is another way you can leave a trade too early.
I’ll give you an example…
Let’s say we set the trailing stop for VTG at 10%. This means the exit point will always be 10% below the most recent high.
What do you think will happen?
OK, have a look at this:
Compare this to the first chart — it’s a very different result.
Setting the exit stop at 10% results in an early exit from the original trade. The system attempts four later entries, but all hit their exits before getting too far.
Tighter stops are more suitable for shorter-term strategies. Quant Trader is targeting stocks that could double, treble, or more. And these trades typically need more room to move.
It’s really very simple. If you want to ride big trends, you need to give them breathing space.
There’s a lot more to say on this topic. It’s a hugely important area. Finding the right time to sell is one of the hardest parts of trading.
I hope you can join me for a special video training series I’m putting on for Port Phillip Publishing subscribers at no extra charge starting this Friday, 3 November.
I’ll explain how you can use my strategy to exit profitable trades yourself. It’s the best way I know to leave the party in the Goldilocks Zone.
Click here to register for this six-day, online video training series.
Until next time,
PS: People say trading is all about when you buy. But I disagree. I believe your exit strategy is the key to making triple-digit profits.
Take Vita Group for instance. No entry method could have predicted a 199% profit in less than 21 months. The skill was all in the exit — not the entry.
I’ll explain how you could benefit from my exit strategy next week. Look out for my free video training session. You can register for exclusive access here.
Quant Trader sources all images and graphs unless otherwise stated.