How to Exploit the Most Powerful Force in the Market
Friday, 24 July 2020
By James Woodburn
Ryan Dinse is back today with more on how to take advantage of the most powerful force in the market: small-cap momentum.
He’s pretty good at it, having recorded some impressive trading wins already this year — even in the midst of the big COVID-related downturn in March.
Look out for a special invitation coming your way from Ryan tomorrow.
If you’re stuck at home and want to learn how to trade the fastest moving stocks on the market, Ryan will show you how it’s done.
‘The Private Trader’s Edge’ series is free…but you have to register to watch it. Look out for your invitation tomorrow.
Now, if you remember last week’s issue, I had wanted to share a call with Ryan this week. Instead, we decided to record that mid-next week because, as you’ll see tomorrow, he’s been pretty busy. But don’t worry…the call is on for next week.
In the meantime, it’s over to the man himself…
On Wednesday, I introduced you to my beloved world of ‘stonks’.
The wonderful world of small-cap investing.
And I explained why I thought not investing some portion of your portfolio in budding small-cap opportunities was a big mistake for the times we live in.
The fact is we live in a world of constant change, of rapid innovation, and of global opportunity.
A world where upstarts, renegades, and disruptors thrive.
The question for you as an investor is how do you make the most of this?
Today, I want to tell you my number one tip for succeeding in the speculative end of the stock market…
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It allows you to ride your successful picks as far as they’ll go, for potentially mouth-watering gains. While also stopping you from losing too much money on the ones you get wrong.
We’ll get to that soon.
First, a quick story…about golf.
(It’s related, I promise!)
You probably haven’t got 10,000 hours to spare in the markets
A while ago, I had a mate who decided he wanted to become a scratch golfer.
For the non-golfers, this means getting your handicap down to zero. Which is pretty much only what the professionals — or very good club pros — have.
He was playing off 10 at the time, so he was a pretty decent player. But to get to zero is very, very hard.
But my mate had a plan…
You see, he’d just read the book Outliers by Malcolm Gladwell.
In this bestseller, Gladwell studied a whole host of successful people and came to the stunning conclusion…
With 10,000 hours of practice you could master anything!
So, my friend quit his job and resolved to play two rounds of golf every day, five days a week. He’d treat it like a full-time job. He figured he’d already racked up a lot of hours playing golf in his life so he thought a year of doing this would be enough to get him over the 10,000 mark.
But he still needed money.
He wasn’t married, didn’t have any kids or a mortgage, and worked out the bare minimum he could live off was $750 a week.
So, the second part of his plan was to hit the casino, each night and play blackjack until he won $150.
To help his odds, he would target the most drunken tables he could find. Sometimes he’d make $150 in just one hour; sometimes it would take all night, but most nights he made it back with $150 in his back pocket.
Did he succeed then? Did he get down to scratch?
I’ll get to that at the end…
But what’s my point here?
The main one is that investing in small-cap stocks takes as much skill as playing golf.
There’s just no substitute for time on the screens, making trades, following the action.
I did this myself as a home trader for four years and it was this time that really made the difference to my career. I learned a lot more about the truth of investing in these times than I ever did in my years of work in the mainstream-investing world.
In fact, the first thing I learned when I went ‘all in’ was how much I didn’t know! The mistake many people — as I did — think is that they can pick up trading ‘just like that’.
That’d be like thinking that just because you can swing a golf club you could play in the Masters.
But with time and practice you can become very good at it. The 10,000-hour rule applies in investing and trading just as much as it does with any other skill.
And yet when your money’s on the line, this can be a tough hurdle…
After all, when you have a stinker on the golf course, you can always start a new round tomorrow. But if you lose money on the stock market, unless you’re very rich, it can hurt a lot.
And while that’s how you learn in the stock market — through mistakes — you can really fast track this process using the information I’m about to share with you.
First, let’s talk about cutting out mistakes — the first step to mastering any skill…
Three things to avoid when you buy and sell small-cap stocks
The first is…
- Don’t buy on the news
This is a common mistake beginner’s make.
They think that a company announcement is a good time to buy. It might be an announcement that validates a part of the company’s strategy or your own thesis.
But in my experience, nine times out of 10, buying on company announcements is a bad move. Think about it for a second.
Where is your ‘edge’ in buying on a piece of information open to everyone else? The answer is there is none.
Now, this doesn’t mean sometimes a company can’t fly higher after an announcement. It can happen. But in my experience, it’s the exception that proves the rule.
Stories in the mainstream press are the same. Where’s your informational edge reading about something in the AFR?
Again, there is none. If you hold a stock and it gets a bit of publicity, which pumps the share price, that’s different. And sometimes you can use these events to take partial profits (just like the pros do).
But take it from me, this is the most basic of errors you can make investing and trading small-cap stocks.
- Use stop-losses
The second point is all about risk management. It might not sound exciting, but 90% of my time is spent on managing risks in my small-cap trades.
Stop-losses are an important tool you should use. But like any skill, it takes some time to master what a ‘good’ stop-loss strategy is versus an arbitrary one.
My own stop-loss process involves a fixed stop-loss on the initial trade entry, followed by a trailing stop-loss once a trade starts moving in the right position.
I use key gauges in momentum to adjust my stop-loss as time goes by. This way I hope to stay on a strongly rising small-cap stock as long as the trend keeps going. Which can result in huge gains when you get it right.
Importantly, my stop-loss system tries to avoid being ‘whipsawed’ out a trade on volatile stock price movements. To do that my momentum indicator uses moving averages to ‘smooth’ out this volatility.
- Don’t go all in one stock
The third point is also about managing risks. And in my experience, I find a lot of people don’t use it.
For example, friends ask me a lot of the time for stock tips. A long time ago, I’d throw them an idea to look at. But then I’d find out later they’d put all their trading capital into this one stock tip I’d given them, which is pure madness.
The fact is, no one knows the future. And if you’re going to invest or trade in risky small-cap stocks, you need to diversify your portfolio so that you aren’t exposed to any one stock too much.
In my opinion, 10–15 small-cap stocks is a good number to aim for.
Small-cap investing is all about having a game plan. You need to think tactically and strategically.
Do this wrong and you could lose some or all of your investment.
But do this right and the rewards on offer are huge.
Check out the best performing small-caps on the ASX in the 2019 financial year for a taste of what’s on offer:
And that’s just one-year returns too I might add.
The other thing worth pointing out is that you can see that it can happen in any sector too.
As I said on Wednesday, small-caps are where tomorrow’s leaders emerge from. Like my budding golfer mate, you just have to put the odds in your favour.
So how can you find stocks like this?
This next ‘trick’ is my number one tip for succeeding in small-cap investing…
Use the force of momentum
This is going to sound so obvious you’re either going to think I’m stupid or you’re going to kick yourself for not thinking of it yourself.
As legendary trader from the 1920s, Jesse Livermore succinctly put it:
‘Buy rising stocks and sell falling stocks.’
In other words, let your winners run and cut your losers.
With small-cap stocks this is more important than ever. Small-cap stocks that succeed can go onto unheard of glory.
Consider this example:
As the internet era started to take off in the dotcom boom of the late ‘90s, a war began for search engine dominance.
Who could have guessed little known garage start-up Google would dominate over big name rival Yahoo and the mighty Microsoft?
And yet that’s what happened, turning Google (or Alphabet as it’s called now) into a company now worth $1 trillion!
The value of Yahoo on the other hand did this.
Source: Business Insider
Many other search engine companies went completely bust.
It just re-enforces my key point.
Staying on the ones that are rising while getting off the ones that are falling was one of my own trading epiphanies.
To do this I use an indicator that measures the price momentum of a stock. In other words, who is stronger right now, buyers or sellers?
It makes the decision to buy, hold, or sell exceedingly easy.
If momentum is positive and I like the look of a stock, we get in. If it stays positive, we hold. If it turns negative, we plan our exit.
Sounds deceptively simple, I know.
And yet it works.
I’m super-happy about that because I built this momentum indicator myself. I call it the MPI. You’ll find out more about it in my upcoming video series — ‘The Private Trader’s Edge’. Details on how to register for my series for free will be in your inbox tomorrow…
I’ll demonstrate the MPI to you in my four-part online series that’s opening for registration tomorrow.
I’ll also show you how powerful momentum can be in successful small-cap stock trading. You don’t want to miss it — I’m not holding anything back. Make sure you check your inbox tomorrow for your free invitation.
Oh, before I forget, you probably want to know how my mate went with the golf handicap?
Well, he didn’t last the whole year. He actually got a bit sick of golf and the nights at the casino wore him down.
But he did manage to get his handicap down to three though, and he was pretty happy with that!
Good investing (and speculating),
Editor, Small-Cap Momentum Alert
PS: FREE REGISTRATION BEGINS TOMORROW for Ryan’s free online series: ‘The Private Trader’s Edge’. He’s going to show you how to take advantage of the most powerful force in the market…small-cap momentum.
You’ll discover how to identify high-potential small-cap trading opportunities that the big funds can’t get into, for the chance to swing for outsized gains in weeks and months. He’ll also reveal his ‘MPI’ trading tool for finding entry and exit points that target the ‘sweet spot’ of a big move up…
Make sure you register for our exclusive online event tomorrow — while it’s free!