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Issue No. 29 – June 6, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
The John Templeton Value filter and the Martin Zweig Growth filter added last week are looking promising. As we near the mid point of 2005, it’s a good time to report how stock and options trading have faired with respect to goals and objectives. But first I want to say a word about building confidence in your trading methods.
1.1 Confidence in Trading
It is worthwhile to make a conscious effort to instill confidence in the methods used for trading. Confidence in your method promotes stability by reducing the number of trades and conserving funds that would otherwise be used in excessive broker fees. It promotes efficiency in that less time and energy are spent worrying. Worry is replaced by systematic inspection with the knowledge of what needs checking and what doesn’t. The more confident you are in a method, the better you will learn it. Confidence is created gradually after a sufficient number of cases for a given trading system have been observed and you can see how it holds up. Thus, it can not be a case of blind faith. Careful observation of system limits need to be made. These limitations tell you when to stay out of the markets and the conditions for which a different system is needed. The process involves understanding the causes of gains and losses along the way. All this takes time. There is no substitute for this time absorbing process for any given trading system.
One of the best confidence builders can be found in money management that is used to avoid large draw-downs by appropriate selection of trailing stops and position size. Another is setting realistic achievable goals. Yet another is restricting yourself to the system you know until you know it thoroughly before expanding to other systems. Although it may seem boring, you should select an approach that can be repeated successfully over and over again. At the same time, confidence in a single trading method gives you a great deal of freedom.
© 2005 Desert Mountain Systems, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser. Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies.
1.2 Options
Option trading has met objectives so far this year. The published goal is to increase total risk capital by 6% at a compounded monthly rate. I know, 6% a month doesn’t seem very aggressive for options trading. But we need a goal that is easily met. Compounded monthly it works out to just over 100% a year. If one doubles his total risk capital each year for 4 years, he multiplies it by a factor of 16. Sticking to this plan leads to a significant accomplishment.
The trick is to do it without the kind of over trading that can result in large draw downs. We pursue our goal while committing only 10% of total risk capital to any single trade. This requires the average profit per trade to run around 14%. We are running slightly above that.
Every month in 2005 has been profitable, some better than others. February was the worst month (+7%) and March was the best (+28%). Table 1 compares the target profit with monthly and cumulative actual profit as a percentage of total risk capital. A graphical representation of columns 2 and 5 is presented in Figure 1.
Table 1 - Options Trading for 2005
|
Month |
Target |
Profit per Trade for the Month |
Profit as % of Total Capital |
Actual Cumulative Profit as % of Total Capital |
|
January |
6% |
25% |
11% |
11% |
|
February |
12% |
7% |
3% |
14% |
|
March |
19% |
28% |
12% |
28% |
|
April |
26% |
19% |
8% |
39% |
|
May |
34% |
14% |
6% |
47% |
FIGURE 1
Members who commit up to 20% of risk capital per trade have nearly met their 100% goal after just a few months of trading. We continue to recommend the standard 10% of risk capital per trade.
1.3 Stocks
The goal for stocks is equally modest. The goal is to increase total investment capital by 1.88% at a compounded monthly rate. This will increase total capital by about 25% a year and double it in about three years. The long term average for the S&P 500 is a positive 10% a year, which doubles one’s capital in 7.25 years.
Once again, we want to avoid the kind of over trading that can result in large draw downs. We commit only 10% of total capital to any single trade while using a -15% trailing stop. The way this works is by maintaining a small portfolio of about 10 stocks while updating on average 1 stock per week. Meeting the target requires the average profit per trade to run around 4.34%. It currently runs at 5.1%. The current stock portfolio of open trades shows a profit of 4.5%. However, after two months of operation, compounded total profits based on closed trades, were 3.7% as compared with the target of 3.8% after the second month.
Figure 2 compares the target profit with cumulative actual profit as a percentage of total capital. Mid April to mid May was a difficult period.
FIGURE 2
1.4 Last day for A Free Month of Advisory Service
If you want a free month of either the stock or options advisory, just send an email to Systems@WiserTrader.com by June 6, 2005 with a brief constructive comment or testimonial about the quality of this newsletter. Be sure to include whether you prefer the stock advisory or the options advisory. Your email gives WiserTrader.com permission to use your name on the website, but not your email address. All constructive responses, positive or negative, will earn a free month of advisory service, whether or not it is used on the site. Your input is appreciated.
2.0 Market Analysis
This week’s economic data, on balance, reflected economic growth at a slower pace than in recent months. That didn't disturb the stock market. Slower economic growth was generally accepted as probable, but now it comes with the benefit of perhaps an improved interest rate outlook. If short-term rates don't go much higher, and long-term rates stay near present levels, current stock valuations look all that much better.
The market has come back solidly the past six weeks. It has come off its lows from the six-month trading range. Trading volume has been moderate, however, and there isn't that much enthusiasm for a possible summer rally. Interest rates won't come down much further. Oil prices might not either. Slower economic growth means slower profit growth. There are plenty of worries to offset the support from overall good valuations on the market.
The stock market may be looking at some slow summer months in which a trading range mentality persists. Industry leaders in Table 2 rank from highest to lowest. Relative strength is given in Table 3 and VTO market sentiment in Table 4.
