4.2 Building a Trading Plan Part 2

Madam’s question over here is that if you’re a long-term investor, would it be advisable to maintain a higher number of blue chip stocks of your, in your portfolio? If I can ask Madam, when do you, what do you mean by a higher number? How much are we talking about? How many? More than 20? Obviously, obviously diversification is a strategy that is going to work always and you’re going to make money especially if it’s an Up trending environment because all issues tend to make money in Up trends, but for me especially when you’re at a point where you are consistently cutting losses, keeping your losses small, then I would suggest to keep those issues, ten issues max. Because for me number one, it’s very important to be focused, especially when you’re staying on top of trading plans. Typically when I have more than 20 issues spread across all my clients, I have a very hard time staying on top of each of the trading plans, because as maybe some of the traders know, when prices are breaking out, you’re seeing a lot of prices stocks breaking out across the board, when stocks are breaking down, there are a lot of times when you’re gonna see breakdowns happening at the same time, I need to be acting, executing at the same time. So for me, focus is a very important principle that I always follow, not just in trading but in life. But I want to be as focused as possible, especially when I hit a winner, that winner can essentially generate returns for me that can eventually outperform the index. Help my portfolio outperform the index. So I’d say if you’re long-term, are you a long term person who’s cutting losses or are you long term person who’s not cutting losses? That’s the question. Because let me tell you something, if you’re a long term person that’s doing peso-cost averaging, meaning EIP, Easy Investment Program, or SAM, Strategic Average Method, then obviously this is something that you shouldn’t be mixing with your EIP. Guys, very important, if you’re already doing EIP, ‘wag niyong i-halo yung natutunan niyo dito sa EIP. ‘Cause ang EIP, ibang laro yan, right. And when it comes to EIP, I can understand, if you’re holding on to 20 issues, hinuhulugan mo yan below the Buy Below price. That is perfectly okay, right. But I would suggest, that if you’re doing even a long-term portfolio but it’s a long term trading, which means it’s a long term technical portfolio, where you’re allocating that long term fund into up trends and cutting issues that are not panning out, then you still need to keep a maximum of ten. Next, Money management habit is, for me, I never, never, never average down. Averaging down on a position is simply sending neutral money or good money after bad money. Nagpadala ka na nga ng pera, naipiit na nga, pinadalhan mo pa ng more money. Which doesn’t, from a technical point of view doesn’t make sense, because if you’re adding on to a losing position not only you’re adding neutral money over to bad money, it also means you’re not cutting your first position in the first place, right. So for me especially when you’re implementing Technical Analysis, at the beginning of a, let say at beginning of your entry, I would maybe exempt this, an exception to this with maybe if your tranching an entry into opposition, maybe you’re, you’re buying ten percent of your portfolio, let’s say into WILCON. And then instead of buying the full ten percent, you buy a five percent and then two and a half percent, and then two and a half percent, and that is something where I could accept averaging down because that’s tranching, but to be able to buy ten percent and then for you to be able to recoup those losses you double down on the position in the hopes of recovering, or you double down because ‘uy mas mura. But remember cheap can always become cheaper. Cheaper can always become even cheaper, right. So I never, when you’re doing technical analysis it’s never recommended to average down. Never send good money after bad and lastly the best practice is to average up as a conservative approach. But average up not more than your allocated position. So you wanna, there was a question asked me during the break earlier, how do you average up effectively? For me it’s simple. You average up in a way where you’re resulting average price will never be lower than your trail stop. Let’s say you have an existing 10% position, you wanna build it up to 20%, but if you add 10% more, it means that your average price, your resulting average price will be higher than your trail stop, then it’s not something that I would do. I always try to keep my average price lower than my trail stop. So at least I’m not prematurely taken out of my position. Bakit walang automatic stop-loss sa COL? So that’s something you’ll notice, not just with COL but with other brokerage houses as well, Is that correct? I asked the same question three, four, five years ago, to guy that originally gave this seminar, he still gives the seminar, and he told me that, it’s a matter of the Philippine Stock Exchange approving the automation of setting stops and buying stops. But in terms of COL according to him, it’s as simple as a flick of a switch, on and off to have it available for COL customers. It’s just a matter of the regulator allowing it for brokers. So now we have a trade plan. So the last point in a trade plan is to be able to measure your trades. Very important, especially if you’re trying to improve in something, best management guru of all time, Peter Drucker said, that you can’t improve in something that you can’t measure. How can you improve in something if it’s not something that you measure. So typically, after trading, the best practice is, if you had any trades for the day, like ako the past 2, 3 days wala akong trades, but if you look at the trades for today, you list down the stock, the important ones are obviously when when you bought it, when you sold it, how many days did you hold it? Net gain loss, hit ratio, you’re running hit ratios, so far meaning how, how your batting average, your average win so far, your average loss and obviously your edge ratio, which is at the ends. Your edge ratio is simply your average win over your average loss. It simply tells you on an average how much money do you make when you win, and how much money do you lose, when you loose money. So typically, and you might want you might want to write this down, if you’re, if you have a batting average of 30%, meaning 3 out of 10, the minimum edge ratio that you need to meet, to hit break-even is 2.4, which means that for every loss that you take, your every loss in 30% batting average, in the 30% that you make money it should be at least 2.4 times, the 7 times where you’re losing money on an average, to be able to make sure that you’re staying on the break-even side. Hit ratio is, you get your total, let’s say for example over 10 trades, out of 10 trades, five yung kumita, 5 yung nalugi. So ang hit ratio mo is, meaning your wins over your total trades, total wins is five, total trades is ten, so your hit ratio is 50%. So parang field goal percentage yan.

2 thoughts on “4.2 Building a Trading Plan Part 2

Leave a Reply

Your email address will not be published. Required fields are marked *