This article originally appeared in Daryl Guppy’s ‘Applied Technical Analysis Tutorials’, voted # 1 trading newsletter in Australia by Shares magazine and # 4 in the world by US Stocks & Commodities magazine and is reprinted here with Daryl’s permission.
In addition to developing strong technical analysis skills, strong trading psychology coupled with thoughtful money and risk management are also vital key secrets to success when trading or investing in the market.
Drawing from real life experience and lessons learned in portfolio management the hard way, John Atkinson originally designed his series of three Money and Risk Management spreadsheets to aid his own trading. With the help of programmers Stephen Parsons and Peter Tamsett, he recently added several easy-to-use macros and has now made them available as easy-to-use and very affordable tools to help traders and investors plan and manage their portfolios.
They are designed to assist in the planning and development of profitable portfolio growth, by implementing structured money and risk management control and as a means of keeping simple and accurate records.
Many investors and traders spend less time planning the risk of individual trades and their overall portfolio for wealth building than they do planning their grocery purchases. Many don’t accurately plan, monitor, or review their progress at all.
Some think that spreading or “diversifying” their portfolio across several major positions in “safe” stocks is their way of approaching money and risk management. They don’t realize that overloading too many positions or too large a position can seriously put their portfolio at risk.
Without proper planning, one can end up with a portfolio that is a disaster waiting to happen. We know. We’ve been there and we don’t want you to go through the sleepless nights and the heartbreaking fear, financial and emotional loss that we and some traders we know have experienced as a result.
One of the main reasons we lost our Sydney waterfront home in 2000 and beyond, as it was not developing or adhering to the correct risk and money management rules, so our series of three portfolio tools It has been created from our own personal experience of very hard hits in a very real way. financial cost of literally hundreds of thousands of dollars and at a huge emotional cost.
Subsequently, we look for the information that we would have liked to have looked for or that we had been notified before. These tools are based on various ‘world best practice’ principles and strategies taught by this newsletter, Daryl Guppy’s books, and by other merchant authors such as Alan Hull, Louise Bedford, Dr. Alexander Elder, and Dr. Van Tharp.
They consist of:
o Atkinson Portfolio Planner © – to plan your stock selection and overall sector and portfolio risk in advance
o Atkinson Trade Optimizer ©: which stocks to buy when you have a few to choose from and the funds are only available for one?
o Atkinson Portfolio Manager © – stop loss, targets, individual stocks and combined portfolio stock curves, expected closed trades and much more
Over the next several weeks we will discuss each of these tools in detail.
We start this week with Atkinson Portfolio Planner ©.
This tool is designed to help you plan your portfolio correctly so that you can sleep at night, knowing that you have a balanced portfolio and are not overly exposed to any trade, volatility pool, or sector.
In addition, you have planned the correct number and size of open positions to ensure that the total risk in your portfolio does not exceed the specified criteria.
This easy-to-use tool allows you to check your planned allocation of:
Mix of high, medium and low volatility stocks
Mix of actions between sectors
Individual risk of each position as% of your portfolio
Maximum% of your portfolio in any position
Total risk of your combined portfolio
Once you’ve entered your requirements, Atkinson Portfolio Planner © will calculate the essential factors above and even flag red alerts if any of your planned or open positions exceed your personal risk profile.
This allows the user to ensure in the planning stages that their hard-earned capital will be brought in correctly to fit the risk levels selected by their own Trading Plan.
It is the user’s responsibility to research and select the criteria that will be applied to his Trading Plan and as a key input to the Portfolio Planner ©, for example volatility and allocation of sectors, stop loss levels and% of risk factors; and for the final selection of which shares to buy and the applicable position sizes.
Put all or most of your available funds in a stock or sector; putting a large% of one’s portfolio at risk in any one position or having too many open positions with an unacceptable total percentage of the portfolio at risk are recipes for potential disaster.
The experience of other traders shows that it is also advisable to diversify your capital in a chosen ratio between a range of high, medium and low volatility stocks to maximize the annual growth of your portfolio.
Experienced traders and investors have different rules for managing money and risk.
The following are some typical examples from the literature:
1. In his books and in this newsletter, Daryl Guppy chooses 1/7 (14.3%) on high volatility (eg ‘speculative’); 2/7 (28.6%) in medium volatility (for example, ‘mid-caps’) and 4/7 (57.1%) in low volatility (for example, ‘blue chips’). Others may choose a maximum of 10% in high volatility. The final choice is the responsibility of the user.
2. For small portfolios, in his book Share Trading #, Daryl Guppy provides an example of how to build from $ 6k to $ 21k, starting with $ 2k (ie 1/3) in high volatility and $ 4,000 (ie 2/3) in low volatility stocks; then dividing this back to 1/7; 2/7 and 4/7 when the portfolio has grown to $ 14k.
3. Maximum position size as% of total portfolio: typically 20-25% absolute maximum; some are reduced to 15% or less for large portfolios or speculative stocks.
4. Maximum variable income risk: no more than 2% of the portfolio will be put at risk in any operation; some choose to reduce this 1% or 0.5% for larger portfolios or for more volatile positions.
5. In my book ‘Ten Ways Not to Lose Your Home on the Stock Market’ (to be published in 2005) I wrote: “What we also didn’t realize was that, instead of spreading our risk, we were magnifying it. Stop 2% loss portfolio risk, let’s say a trader has ten positions. That means if the market suddenly dips and all stops are triggered, you risk losing 20% of all the value of your portfolio. Extend that to twenty positions, then 20 x 2% = 40% of your portfolio is at risk. It can happen, it happened. If you freeze or have margin loans, the destruction can be much worse …
Dr. Elder refers to the 2% risk rule as protection against shark attack and extends the concept to a 6% rule to protect against piranha attack, that is, close the entire portfolio if a 6 falls. % in the last month.
Taking this to its logical length, Dr. Elder describes how, using this strategy, he also limits traders to three positions (at 2% risk) to start with, until some of them make a profit, before opening positions. additional “.
(Readers may want to check out my Home Study course module on Money & Risk Management, which is based on Daryl Guppy’s Share Trading & Better Trading books and includes my portfolio tools, available on our site. Also check out the books from Louise Bedford (eg trade secrets) and Dr. Alexander Elder (eg enter my trading room) for further explanation).
In the following article, I discuss how we use Atkinson Portfolio Planner to ensure the following planned risk and money management criteria are met:
1. The maximum total amount spent on each volatility group
2. The maximum total value spent in any sector
3. The maximum position size as a percentage of the total portfolio
4. The equity risk of each position
5. The total combined risk exposure of the portfolio
