We updated the investment calculator and position size tool for member’s use. Monthly goals should also consider stop loss and more importantly, how much you could lose, if the trade or position moves opposite your anticipated direction. We use this tool, after 1) we’ve established support and resistance 2) we’ve determined the probabilities that the trade will work and 3) we’ve made sure the stock has sound fundamentals. Finally, we always check earnings dates and news to make sure we have time for the trade to work.
Updates and Revsions to the Tool
Below are a few screen shots for new members who haven’t seen this calculator. Directions are self-explanatory.
Input a Reasonable Monthly Goal
When considering a position in any stock, input the number and cost of shares in the appropriate fields. The spreadsheet calculates your cost basis, so you can quickly determine if your goals are realistic. Adjust your goals accordingly. For example, if we are taking more that one position, that needs to be considered.
If our goal is $6,000 per month and we enter a potential winning stock pick at $29.00, we’ll need 2.07% gain on 500 shares. Alternatively, you can adjust the number of shares and recalculate. If you think the stock being analyzed has the potential to rise 2.07% from your entry point, you might go on to considering your stops. Typically, we want a minimum 2:1 reward to risk ratio, so a stop should initially be set to (-1%), half of your expected gain.
It might seem trivial, but professionals know ahead of placing a trade, what they are willing to lose before they enter a position. Read that again; know what your expected loss is before taking a trade.
The problem with new investors is, focusing on what you can make and not on what you can lose.
Position Size and Stop Loss
The calculator we use for position size should also consider how much we are willing to lose on every trade, so the attached Excel spreadsheet was revised to include stops on line 27. To change the amount of your stop loss, change the value in C27. We currently have this set to 5%, since we will usually have more than one position working at any given time. Using the thought process above, you could change this to (-1%) and recalculate.
If your cost basis is $14,500, then your potential loss (5%) is $725.00. It’s sobering when you look at trades this way.
By contrast, if we adjusted our stop loss to (-1%) we would expect a $145.00 loss, much more palatble. Click on C27 and adjust to (-1%) loss.
Given we now know what we can lose ($145.00), a trader has a better sense of the viability of the trade and whether or not goals need adjustment. The next step is to write down our entry and exit points, prior to the opening bell.
The Excel spreadsheet discussed above is attached to the email sent this morning. I’ll also deposit a copy in the alerts channel in the trading room.
Finally, the table below is from my book, “Trade and Think Like a Professional Trader” and something every new trader should consider, before they envision the riches a trade will bring to their bank account. Taking a loss early, before it has a chance to snowball, is part of the business.
Futures are flat to slightly higher on dissapointing pre-market action in money center banks. JPM is lower (-1.72%). Citigroup is also trading lower (-0.76%) to start the day. While financials are off, technology stocks seem to be fine.
Our LIVESTREAM broadcast and daily coverage will start at 9:15 AM. Join us LIVE, as we take trades using a strategy based approach to the markets.
Happy Fry-Day.
Vinny