Sunday, 10 July 2011

Book summary - Alexandra Elder - Sell and sell short

 As usually, I like to record what I had read in blog just in case I forget it in future.(only read front portion of books so far.)
  • Limit your loss on any trade to 2% of equity in your trading account.
  • Whenever the value your account dips 6% below its closing value at
    the end of last month, stop trading for the rest of this month.
(meaning if you got 100k in total, per trade max can only lose 2k. If you lose 6k in that month, stop trading, take a break and look though and learn your mistakes.)

His money management rule is so strict. No wonder he can preseve the captial in his portfolio so well. However, I don't think I will follow the above two rules strictly unless I am doing active trading daily.

Instead, I am currently trying to restructure my portfolio with the aim of controlling the amount of money which I put into each type of stocks. I only understand the important of this idea recently. I aim to have around 10-15% per type with no more than 60% invested in current market condition.

Mr Market, please give me a chance to succeed in rearranging!

7 comments:

Singapore Man Of Leisure said...

Hello OT,

I use this 2% cut-loss rule for my margin trading and other leverage trades using CFD or futures.

But for my core non-leveraged equities holdings, 2% is not suitable as I will be stopped-out with the normal market fluctuations. I prefer to use a 10% cut-loss rule instead.

It's a good book - the 3 Ms are easy to remember!

But as with all systems, I will internalise it to fit me.

Createwealth8888 said...

You swear that you have found the best GPS Navigator in technical analysis; but there are two ways to use it.

You trust 100% the accuracy of its signal. When the GPS Navigator says Right you keep right and turns. When it says Left, you keep left and turns.

But, you found out the "RIGHT' way to use it. When the GPS Navigator says Right you keep right and turns. When it says Left, then you argue with it. It is not the 'RIGHT' way to turn. There is no Left turn hor!

That is one of the problem of people using GPS in the stock market.

OT83 said...

Hi SMOL,

Agree if 2% for core non-leveraged equities holdings will be kick out easily, cut loss indeed is good.

So far I never do any leverage before. Don't dare too. Maybe when one day I dare to, I will follow the 2% rule.

Hi uncle,

I don't quite get the GPS thing.
I saw that you post http://createwealth8888.blogspot.com/2011/06/how-do-you-navigate-in-stock-market.html
in your blog.

Possible to explain more? Thanks

Createwealth8888 said...

When your TA signals "Buy"; you confidently obey and buy. But, when your TA signals "Sell" and cut loss. You may say;" Wait a minute. Why should I sell and cut loss.".

How many TA followers will obey their system on both buy and sell signal?

Singapore Man of Leisure said...

Hello OT,

Thanks to LP, I've discovered where I have failed in my communication... Apologies. My earlier comment to your post is my "internalised" way of handling my leverage and non-leverage trades - I am not following Elder's rule blindly or completely.

For eg,
-------
Capital $50,000 with Elder's 2% risk rule per trade

1) All-in trade = $50,000 position. Cut loss point = - 2% of entry price

2) 20% of capital trade = $10,000 position. Cut loss point = - 10% of entry price.

3) 10% of capital trade = $5,000 position. Cut loss point = - 20% of entry price? Now this 2% rule becomes a bit ridiculous....

That's why my "internalised" rule for non-leverage position (no matter how big or small) is 10% cut-loss point. For leverage trades, it's 2% cut-loss point. I keep it simple. Remember, 5 to 1 leverage on 2% loss trade = 10% loss on cash risked. Ouch!

Like my string and shoe story, we have to find the right shoes to fit our own feet :)

la papillion said...

Hi SMOL,

The cut loss level is determined before all this calculation are made. It's simply made by looking at the charts. It's AFTER you've determined the potential loss of your trade, THEN you start calculating the size of the capital to use for this trade.

Hence, if you decided beforehand to use 20% of your capital in your example above, then your cut loss level can be up to 10% below the entry price. But that's the max you see...exactly where to cut loss is determined from the charts, but in this case, it cannot be more than 10% below the entry.

Likewise, if you use 10% of your capital to trade, the max cut loss level is 20% below entry. If the charts show that 5% below your entry is a good place to cut loss, then you should not drag it to 20% below entry.

I think the rules apply equally to leverage. The rule is 2% of your equity. Equity = marked to market value of stock + cash - liabilities. Suppose you borrow 10k, so your cash increases by 10k but correspondingly your liabilities also increase by 10k. Your equities doesn't change by leverage. If anything, it gets lower because of cost of leveraging.

I don't think in his books, he mentioned anything about leveraging with reference to these rules.

Of course, that doesn't mean your way is wrong. I'm just commenting that your interpretation of the text is different from mine :)

Singapore Man of Leisure said...

Thanks LP!

Yes, I infer this leverage on Elder. I realised my mind is a bit weird. I see things that's not there, and I don't see things right in front of me!

When I am in the Trading mode, I use leverage, and it got stucked whenever I read trading books... Trading for a living without leverage is like finding a white tiger - very rare.

Thanks to you, I've learnt how my bias and selective perception affect my learning. Interesting!

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