This article was originally published in Daryl Guppin’s book, Guidelines for Applied Technical Analysis, but was not voted on by 1 magazine in Australia by Shares magazine; It was voted 4 times worldwide by the U.S. Stock and Commodity Magazine and reprinted here with Darylin’s permission.
In addition to developing sound technical analysis skills, a strong trading psychology, along with well-thought-out money and risk management, is one of the key secrets to success when trading or investing in the market.
John Atkinson, who learned very hard from real life experience and portfolio management lessons, first developed three Money and Risk Management tables to help his business. With the help of programmers Stephen Parsons and Peter Tamsett, he recently added several user-friendly macros and now offers them to traders and investors as simple and very affordable tools to use to enable them to plan and manage their portfolios.
They are designed to help you plan and develop profitable portfolio growth by putting structured money and risk management controls in place and as a means of keeping simple and accurate records.
Many investors and traders spend less time planning grocery purchases than they do in planning their overall portfolio to create individual trading risk and wealth. Many do not plan, monitor, or review their progress at all.
Some people think that spreading or ‘diversifying’ their portfolios into several large positions on ‘reliable’ blue chips is a way to deal with money and risk management. They are unaware that overloading in many positions or in a very large situation can seriously risk their portfolio.
Without proper planning, an impending disaster can result in a portfolio. We know. We were there and we wouldn’t want you to spend sleepless nights and break the fear, material and spiritual loss in your gut, and as a result live a few traders we know.
The main reason we lost our home on the Sydney coast in 2000 and beyond is because we didn’t develop or follow risk and money management rules – that’s why our series of three portfolio tools was created from our own very hard hitting experience. literally hundreds of thousands of dollars in financial value and a huge emotional cost.
Then we started looking for the information we were looking for or recommended in advance. These tools are based on the principles and strategies of this bulletin, Daryl Guppy’s books, and various ‘best practices from around the world’ taught by other commercial authors such as Alan Hull, Louise Bedford, Dr. Alexander Elder and Dr. Van Tharp.
o Atkinson Portfolio Planner © – to plan your stock options and overall sector and portfolio risk in advance
o Atkinson Trading Optimizer © – What stocks will you buy when you have several to choose from and only one fund?
o Atkinson Portfolio Manager © – Stop losses, targets, individual stocks and combined portfolio capital curves, closed trading periods and more
We will discuss each of these tools in detail in the coming weeks.
We start this week with Atkinson Portfolio Planner ©.
This tool is designed to help you plan your portfolio properly so you can sleep through the night knowing that you have a balanced portfolio and are not too exposed to any trade, volatility group or sector.
You also plan the right number and size of open positions to ensure that your overall portfolio risk does not exceed certain criteria.
This easy-to-use tool allows you to check your planned distribution:
A mixture of high, medium and low variability shares
A mixture of shares between sectors
Individual risk of each position as a% of your portfolio
Maximum% of your portfolio in any position
The overall risk of your combined portfolio
Once you have entered your requirements, Atkinson Portfolio Planner © will calculate the above key factors and even mark red alerts if one of your planned or open positions exceeds your personal risk profile.
This allows the user to ensure that the hard-earned capital in the planning stages is properly distributed according to the risk levels chosen by your Trading Plan.
It is the user’s responsibility to research and select the criteria to be applied to the Trading Plan and as the main entry into the Portfolio Planner ©; for example, variability and sector distribution, stop damage levels and% risk factors; and for the final selection of which shares (s) to be acquired and the position dimensions to be applied.
Put all or most of your available funds into one part or sector; Risking a large portion of your portfolio in any position, or having too many open positions with an unacceptable total% risk, are recipes for a potential disaster.
The experience of other traders shows that it is also wise to diversify your capital to a select ratio between high, medium and low volatility stocks to maximize the annual growth of your portfolio.
Experienced traders and investors have different rules for money and risk management.
Some typical examples from the following literature:
1. Daryl Guppy chooses 1/7 (14.3%) in books and in this bulletin with high variability (e.g. ‘Speculators’); 2/7 (28.6%) at medium variability (e.g. ‘medium caps’) and 4/7 (57.1%) at low waves (e.g. ‘blue chips’). Others can choose a maximum of 10% at high fluctuations. The final choice is the responsibility of the user
2. For small portfolios, Daryl Guppy, in his book Share Trading #, presented a building example with high volatility starting at $ 2k (i.e. 1/3) and $ 4k (i.e. 2/3) between $ 6k – $ 21k. in low ripple reserves; then divide it into 1/7 parts; 2/7 and 4/7 when his portfolio grew to $ 14 million.
3. Maximum position size as% of total portfolio: usually absolute maximum 20-25%; some are reduced by 15% or less for large portfolios or speculative stocks.
4. Maximum capital risk: It should not exceed 2% of the portfolio to be risked in any trade – some choose this 1% or 0.5% reduction for larger portfolios or higher volatile positions.
5. In my book ’10 Ways to Not Lose Your Home on the Stock Exchange’ (2005), we did not even realize that instead of spreading our risk, we increased our risk. Stop losing 2% portfolio risk, let’s say a trader has ten positions. That is, if there is a sudden dive in the market and if all the stops work, there is a risk of losing 20% of the value of the whole portfolio. Expand it to twenty positions 20 x 2% = 40% of the portfolio is at risk. This can happen – that’s what happened. can be ….
Dr. Elder refers to the 2% risk rule as protection against shark attacks and extends the concept to the 6% rule to protect against piranha attacks, ie to close the entire portfolio if it drops to 6% last month.
Taking this to a logical extension, Dr. Elder explained how he used this strategy to limit traders to three positions (at 2% risk) to start before making a profit before opening some positions. “
(Readers may want to refer to the Money & Risk Management Home Course module based on Daryl Guppy’s Share Trading & Better Trading books, which includes my portfolio tools and is available on our website. See also Louise Bedford’s books (for example, Trade Secrets) and Dr. Alexander. Elder (for example, come to the Chamber of Commerce) for more explanation.)
In the next article, I will discuss how we use the Atkinson Portfolio Planner to ensure that it meets the following planned risk and money management criteria.
1. The maximum total value spent on each variability grouping
2. The maximum total cost spent in any sector
3. Maximum position size as% of total portfolio
4. Capital risk for each position
5. Exposure to combined total portfolio risk