‘Look Dad, No Hands!’
Monday, 27 July 2020
By Greg Canavan
Over the past week, you’ve heard a bit from my colleague Ryan Dinse and his techniques for trading small-cap stocks.
Friday’s essay was particularly good. If you missed it, you can check it out here.
In it, Ryan gave three tips for small-cap traders:
- Don’t buy on the news
- Use stop-losses
- Don’t go all in on one stock
All three are important.
But if I had to pick one, it would be number three.
The amount of times I have heard about, or from, people losing big on a highly risky stock is incredible. The only way you can lose big is if you go too hard at the one stock.
A lot of people trade small-caps because they want to win big. They are inherent risk takers.
That’s great, and it should be encouraged. Life without risks is boring.
For example, I take my seven-year-old daughter to the local park for a bike ride. Near the (fenced off) playground, there is a large hill built for the slippery slide. We bring the bikes up the hill and ride down. It’s a great thrill for her.
The first time she did it though, there was some hesitation. It’s a pretty steep hill, especially for a seven-year-old. I said as long as you hold on tight, and focus and concentrate, you’ll be fine. (In other words, take the risk, use common sense, and you’ll get the reward.)
Needless to say she loved it.
Taking risks with stocks also needs to come with some common sense.
Loading up on a small-cap in the hope of winning big is akin to riding down a bumpy hill with no hands. It’s stupid.
But that’s what loads of people do. I see it all the time. And because the few people who get lucky doing this boast about it, others think it’s doable as well.
In my view it’s not.
The best way to make money in small-caps is to take plenty of trades with a controlled position size. This way, you give yourself plenty of options for finding that BIG winner, without rolling the dice on a single stock.
The other problem with the single stock dice roll is that you become emotionally invested in it. Your hopes and dreams are bound up with its performance. Selling it becomes that much harder because your ego doesn’t want you to let go of ‘your hopes and dreams’.
This is exactly why you need a ‘system’ if you want to trade small-caps. Position sizing, stop-losses (or an exit strategy), and an entry strategy too.
As Ryan says, the worst thing you can do is to simply trade the news, or buy stocks because they’ve appeared in the headlines or business pages for one reason or another.
Ryan’s system enters trades based on a proprietary indicator he has developed over years of trial and error. He took me through it a month or so ago. I liked it. It makes sense. It is smart. And based on Ryan’s track record, it works.
This proprietary indicator is based on momentum. Not familiar momentum indicators like the ‘Relative Strength Index’ (RSI) or ‘Moving Average Convergence Divergence’ (MACD). They’re that common and well used that you can’t possibly have an edge trading them as your main guide.
I don’t know the specifics of Ryan’s indicator. But it’s not used by anyone else. That’s why he’s calling his system presentation ‘The Private Trader’s Edge’. If you’d like to understand more about it (and see how the system signals buy and sell points), you can sign up for Ryan’s three part series, here, for free.
At a time where central banks have destroyed all meaning of what ‘money’ is, you know markets (and especially small-caps) are going to be volatile. There is no doubt money to be made in such markets…but if you’re not trading with a solid system backing your decision making, you’re riding down the hill, no hands.
By the way, my daughter has just started to do the ‘look, no hands, Dad’ (not down the hill, thank goodness) for a split second as we ride along. I tell her not to. Her problem is that she hasn’t had a decent stack yet. It’s coming. Really, it’s the only way we learn.
I was going to chat about the market today, specifically about the disconnect between equities and bonds (or is there?), and the soaring gold price. But I’ll leave it to Wednesday.
For today, I’ll leave you with some top-notch analysis from Murray Dawes and his ‘Week Ahead’ video. As you know, Murray has been calling for a sell-off for some time. Are we at the start here?
By Murray Dawes
[Click on the picture above to see Murray’s analysis of the E-mini S&P 500 futures, ASX 200, US Dollar Index, gold and silver.]
The markets seem to be heating up in preparation for a big move.
I continue to see risks to the downside in US equities. The NASDAQ has been hit by some profit taking over the last couple of weeks and a few key stocks confirmed weekly sell pivots last week. I show you the stocks in the update.
Gold and silver have bolted out of the blocks this morning, with gold spiking through its all-time high of US$1,920 set in 2011. I think risks are increasing that gold will meet some selling pressure soon, but the big picture remains extremely bullish.
The US Dollar Index has busted below major support at 94.65 (March ‘20 low) and needs to scramble back above that level in the short term, otherwise there is the risk the US dollar could sell-off a lot further.
I have a look at the S&P 500 Index priced in euros in the ‘Week Ahead’ video above. If European investors take fright at the plummeting US dollar hurting their returns they may hit the sell button in US equities.
The US election is not that far away, and Joe Biden is ahead in the polls. A Biden win would be negative for stock prices based on the tax changes that would occur for US businesses. Therefore, I reckon the upside in stocks is capped until the election is out of the way.
There are plenty of dominoes lined up beneath current prices, so it won’t take much to get the ball rolling to the downside.
You can access the table of contents for today’s video update by clicking on the three horizontal lines in the bottom right corner of the video.
Editor, Pivot Trader