The Key to Successful Small-cap Trading System
Tuesday, 15 October 2019
By Ryan Dinse
Hi, Greg Canavan here.
Your regular editor, Bernd Struben, is out sick today. Something to do with a bug picked up from his little one.
I asked him to spare me the details.
And he asked me to cover for him today.
Which turned out to be perfect timing. If you read Monday’s Insider, you will have seen a short video I recorded with analyst Ryan Dinse.
In it, we discussed the secret behind the success of his trading service, Billion Dollar Breakout Trader. I say secret, tongue in cheek. There are no secrets in the market. Only methodologies.
Some work. Some don’t.
Ryan’s methodology works because he has spent many years perfecting it. As he explained in his first video, he lost a lot of money when he started out trading. It’s only when your lose money that you truly learn your lesson.
In today’s video, we discuss how Ryan applied these lessons to build a small-cap trading system that generates consistent results.
Let me be clear. No trading system is infallible. There are only robust and weak ones.
I can confidently say that Ryan, drawing almost two decades of investing experience, has built a robust trading system. I encourage you to tune in to part two of our chat, here. And keep any eye out for part three, tomorrow.
For now, let’s have a look at the markets, then I’ll pass you over to Ryan.
Overnight, the Dow Jones Industrial Average closed down 29.23 points, or 0.11%.
The S&P 500 closed down 4.12 points, or 0.14%.
In Europe the Euro Stoxx 50 index closed down 13.66 points, or 0.38%. Meanwhile, the FTSE 100 lost 0.46% and Germany’s DAX closed down 25.09 points, or 0.20%.
In Asian markets Japan’s Nikkei 225 is up 404.75 points, or 1.86%. China’s CSI 300 is up 0.42%.
In Australia, the S&P/ASX 200 is up 11.60 points, or 0.17%.
West Texas Intermediate crude oil is US$53.22 per barrel. Brent crude is US$58.88 per barrel.
Turning to gold, the yellow metal is trading for US$1,495.95 (AU$2,208.70) per troy ounce. Silver is US$17.77 (AU$26.24) per troy ounce.
One bitcoin is worth US$8,314.19
The Aussie dollar is worth 67.73 US cents.
The Key to Successful Small-cap Trading
By Ryan Dinse
[Editor’s note: Today’s essay is from my Billion Dollar Breakout Trader weekly report dated 9 September 2019, with minor updates.]
As I type this, we’re in the rare but pleasing position of having all our open trades in the black.
All 11 are in profit.
While gold and oil dominate the headlines — and we’ve a few trades doing well here — I’m also seeing funds flow into speculative sectors in health and technology too now.
Which is telling me that despite the negative sentiment in the mainstream, the market is positioning itself for an almighty melt-up rally in the months ahead.
This is not a popular view, of course.
And I’ve no evidence beyond the charts to back this up for you.
But that’s the point really…
It’s not sentiment nor headlines that drive share prices. It’s money. The flow of money dictates whether buying power is greater than selling power. Or vice versa.
And that’s why we use the stories told on charts as our primary research tool when we make our trades.
As long as this continues, we’ll keep taking any trade alerts that come our way. So, look out for that.
But today I want to explain the real key to making the big bucks in this style of trading.
It’s all about your system…
The three outcomes you want on a trade (and the one to avoid)
I’ve said this before, but it bears repeating.
When you’re trading a system, there’ll be times when you make a bunch of losing trades in a row. And happier times, like now, when you make a bunch of winning trades in a row.
Over time, they average each other out.
Your job isn’t to guess which time is which. Your job is to keep sticking to your system — albeit with minor adjustments as market conditions change.
But no matter the markets, the outcome of each trade should always be one of three things:
- A small profit
- A small loss
- A big profit
The one thing you want to avoid is a big loss.
If we get a trade wrong and momentum shifts, you need to get out of the trade. A loss of around 20% as a maximum is ideal, though 30% on occasion is OK, too.
When we take some profits on an initial breakout surge and move our stop-loss up, we’re hopefully locking in a small profit as a worst case scenario.
But, to turbo charge your returns you need to do this…
Letting your winners ride
In my trading career, this was the piece of the trading puzzle that gave me the most problems.
When to finally sell completely out and lock in my profits?
It’s a tough question to solve in real time…
There’s nothing worse than selling too soon, only to watch a stock surge.
But on the flip side, watching a stock surge, only for it to come all the way back down and see all your profits disappear is hard to take, too!
That’s why I developed my special momentum indicator.
As you know by now, we use this indicator to help us time entry points.
But it’s also used to stay in a trade as long as possible. Because it uses averages, it smooths out some volatility in the day-to-day pricing, making holding a lot less stressful.
The basic strategy becomes: If momentum is positive, stay in the trade. If it turns negative, consider selling out.
This idea became a game changer for my own trading. It meant I stayed in the big winners as long as they were moving up.
And it’s getting in those few big winners that really transforms your trading returns from good to great.
It’s the money maker that makes this system work so well. One great trade can more than make up for many losing trades.
Let’s look at a live example from the current trade list…
Follow the momentum
Check out the live trade in Alcidion Group Ltd [ASX:ALC].
Source: Incredible Charts
We’re up 400% in this one and continue to hold. (Update: Correct as of 15 October 2019, but reserve the right to recommend a sell at any time.)
I’ll happily admit, that apart from some preliminary research to make sure the company had the kind of exponential potential we want to know is there, I’ve not followed the Alcidion story too closely.
Because the chart tells me everything I need to know.
As you can see, the bottom panel is our key momentum indicator. And if you follow the blue line, you can see it has stayed positive (above zero) ever since we entered the trade.
That’s pretty much all I’ve been watching.
Not company news, not industry analysis, not mainstream headlines…just a blue wiggly line that told us to stay in the trade as people were buying up.
How simple, eh?
I won’t show you these charts, but all our other trades on the buy list are doing much of the same thing.
Now to be clear, this isn’t a ‘magic’ indicator. It can be wrong.
And that’s why when it turns negative, I don’t automatically sell. But when that happens, it does prompt me to at least review my exit strategy on the trade.
Perhaps I’ll look deeper into the company, or I’ll use other charting tools like support levels to tighten our exit point.
The momentum signal is my cue to divert my focus to a stock. Just like it is on entering a trade.
The point is, by simply following price momentum, you can pinpoint when you need to act and when you can simply sit back and let your winners ride.
Not only does it make trading a lot easier and less stressful. It also makes sure you stay on the big winners as long as you can.
And that’s the key to a profitable small-cap system, in my opinion.
Editor, Billion Dollar Breakout Trader