Up 27% in 4 Months, How the Big Wins Pay the Profits
In this week's issue:
- Stockscores’ Market Minutes Video – Understand Your Opinions
- Stockscores Trader Training – Up 27% in 4 Months, How the Big Wins Pay the Profits
- Stock Features of the Week – Abnormal Breaks
Stockscores Market Minutes – Understand Your Opinions
Traders make decisions based on information but can often be guilty of believing what they want to believe. Make sure you understand what your opinions are based on and beware of emotion creeping in to your decision making. Trade of the week on MARA.
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Trader Training – Up 27% in 4 Months, How the Big Wins Pay the Profits
Last week’s Market Minutes video was about the importance of letting your winners win. For this week’s newsletter commentary, I want to put some real numbers to that assertion and demonstrate the power of this simple but important rule.
I will use the performance of the featured stocks in the Tradescores Alerts daily email newsletter and trade alerts (www.tradescores.com) that have been exited since the start of August.
There have been 41 trades closed out since then. 19 have been profitable for a 46% success rate.
That statistic will make many wonder about the effectiveness of a strategy that is only right 46% of the time. I will stress what I have often said in the past; it is not how often you are right that matters, it is how much you make when you are right that is important.
Trading is a numbers game. We will not be right all of the time so we must limit the size of our losses. When we are right, we have to let the winners win so they can pay for our losers.
I consider any stock that makes more than a reward for risk of 5 to be a big winner.
Reward for risk is calculated as follows. The risk is the difference between the entry price and the stop loss price. The reward is the difference between the exit price and the entry price. So, buy a stock at $10 with a stop at $9, then sell it at $15 and you have a reward for risk of 5.
Out of my 41 closed trades, there were just 6 that had gains of greater than 5RR. However, those 6 are what brought the overall strong performance because the remaining trades were either smaller winners or small losers which tend to balance each other out. Here they are:
- DPW +327% in 33 days (25.7RR)
- RLOG +160% in 18 days (8.7RR)
- ATOS +111% in 2 days (5.2RR)
- INFI +148% in 11 days (10.9RR)
- RDNT +41% in 45 days (6RR)
- CAPR +141% in 12 days (6.1RR)
The total Reward for Risk gain from the 41 trades was 61.4. The six big winners above add up to 61.6. That means the other 35 trades lost a combined total of 1.2. The overall performance for the portfolio is +27% in the 4 months. During the same period, the S&P500 returned just under 4%.
This is where people have difficulty with trading. They want to be right more than they are wrong. They want to treat trading like school where getting an A requires being right 90% of the time. Trading is not like school, it is more like sports.
How many shots does a hockey or basketball player make without scoring? How many holes does a golfer play that don’t end in birdies? We know that in most sports, athletes fail to excel most of the time. To be great, you have to fail a lot.
Approach trading with this mindset. It will allow you to cut the losers that are not working and to be patient with the winners that are.