This may sound way too easy, but successful traders manage risk. They don't care about losing money on trades that don't work. They exit those trades and put their capital to work in a better trade. Many trading services will try to WOW you with a splashy headline like "50 winning trades in a row"! While that would certainly be a recipe for trading success, it's simply not realistic and we all know it. Ask anyone who's actively traded in the equities market and they'll tell you that you have to expect losing trades. They happen to everyone. The problem is that too many traders allow losses to expand and become psychologically draining. We've all had that feeling. We're down on a trade and we're going to wait and "the next time it goes up", we'll exit. We all know the drill. It either keeps going lower and we get more depressed or it does bounce and suddenly we decide it's worth holding....only to see it tumble again.
Holding a losing stock does two things. First, and quite obviously, it drains capital. Second, and this one gets overlooked, it ties up your capital. Therefore, the lesson is that you should never buy a stock without first recognizing the point at which you will exit - either at a predefined profit target or a clear stop level. It's our secret sauce that leads to outstanding risk adjusted returns.
Let me offer up hope and a positive change. I can promise you that we've not had 50 winners in a row at EarningsBeats.com. Since March 31st, we've sent out 62 trade alerts to our members - all on the long side. (We don't short during a bull market). Of the 62 trade alerts, here are our results:
31 winners held an average of 14 calendar days
27 losers held an average of 6 calendar days
4 current open trades held an average of 10 calendar days
We don't hold long because we expect immediate results. While the percentage of winners is quite modest, here's where risk management shines:
Our 31 winners have totaled gains of 217.76%, or an average gain per trade of 7,02% (over just 14 calendar days!)
Our 27 losers have totaled losses of 59,84%, or an average loss per trade of 2.22% (over just 6 calendar days - bag the losers!)
Our 4 open trades are all up and they average a gain of 3.20%
These trades have resulted in a risk adjusted return of 62.82% in 8.5 months. During the same span, the S&P 500 has risen 13.25%. We have outperformed the S&P 500, on a risk adjusted basis, nearly five fold. This incredible outperformance does not come from a huge winning percentage on trades. Rather, it comes from managing risk and exiting losers while they're small.
This week, we had two trades that perfectly illustrate how we've performed as well as we have. One trade was Extreme Networks (EXTR) and the other was Electro Scientific Industries (ESIO). Let's look at the setups and what went right/wrong:
The EXTR trade set up nicely with a 50 day SMA test and entry at $12.39. We wanted to see the 50 day SMA hold as closing support (ie, a close below the 50 day SMA was our stop). The next day EXTR hit $12.87 at its intraday high, but weakened throughout the balance of the week and closed on Friday at $12.02. Buh-bye! It was a 2.99% loser. Will it bounce back? Perhaps, but it didn't behave like we wanted it to so it's G-O-N-E, no questions asked. You must be disciplined with your stops and we are.
The ESIO trade was executed to perfection. We had two entries that averaged out to $19.61 to lower our risk and increase our reward to risk ratio. We had a very tight stop below $19.24, the intraday low from early November's gap higher. Our target was originally above the 20 day EMA, but we noticed that volume was heavy and ESIO moved above the 20 day EMA intraday. What we didn't want was a false breakout and failure to close above the 20 day EMA. That potentially could mark a short-term top and we were up over 10% in just three days. Did we want to risk that type of gain in just three days? NO WAY, so we sent out an email to members, raising our closing stop to the 20 day EMA. Friday's close was just beneath that level so we took our nice profits. Could it go higher? Sure, but our 10.10% profits are in the bank after just three trading days. No more worries and cash is freed up for opportunities ahead.
I want you to see us in action at EarningsBeats.com. I think you'll love the patience and discipline that we live by. It's in our tag line - Better Timing. Better Trades. And we try to live it each and every day. I'm offering a special holiday promotion to include a trial subscription (no expensive or long-term commitment), A COPY OF OUR CHARTLIST of over 275 companies that have beaten both revenue and earnings estimates in their latest quarter earnings reports, and a seat to a very educational webinar featuring me and Tom Bowley, Sr. Technical Analyst at StockCharts.com. I'll be discussing our superior risk adjusted returns and Tom will show you how you can download the ChartList I'll send you....and then will show you how he runs scans every day to identify top notch trading candidates. It will be a packed house and we'd like for you to be a part of it. CLICK HERE for more details of this offer.
At your service,