Copyright © The Inflection Point Inc.
Published 29 December 2017
The ONE thing costing ONE in three 90%
Half of all human purchases are made on pure impulse. The idea to buy flashes in your mind – and half the time – you don’t consider anything besides how you feel in the moment.
So, you came here for the ONE thing, right!? The ONE thing that can save one in three 90% of their portfolio is a key piece of your style know as position size. To lose 90%, you must risk 90% or more. Fluctuations in portfolio can toy with your emotions if you let them. The confident buyer or seller increases position sizing with confidence. I first learned what it feels like not to trade with any emotion when I began in a market simulator. It still wasn’t easy ignoring my balance fluctuations, but it gave me way more confidence and consistency.
94% of entrepreneurs fail when attempting to capitalize in their market. One in three will lose 90% or more. Decide the maximum amount of risk you are willing to accept in a predetermined time and base your position size off your calculated risk.
Situational awareness regarding your exposure to risk in your positions will greatly increase your odds of success. Even if you win 5 out of every 10 trades, the odds of losing in six straight positions over the course of a 50-trade period are greater than half.
If your position sizing is 10%, six losses would send your account down 60%. To recover from a 60% loss, you would need to rally +250% just to get back to breakeven.
The key is to risk a very low amount when entering a new or unfamiliar market until you realize you win-loss percentage. Let’s say you risked 2% in each position. Losing six straight, you will only suffer a 12% loss. To come back from a 12% loss, you would need to gain +13.6%, a more reasonable feat.
Stay tuned for more trends in your market and good luck with your executions!
Published 23 September 2017
Five Land Mines in Your Field
Position Sizing - As NOT seen on TV!
Occasionally even quality positions get crushed. Sh*! happens. Simply adjusting your position sizing by risking no more than 2% in any one position will soften the otherwise heavy blow - not only to your portfolio - but also to your self-esteem. Lessening your position size takes added emotion out of future decisions, which I’ll talk about more in Land Mine #5. There is a reason mutual funds* diversify into fifty or more stocks with no more than a few percent in any one. The calmest one in the room is always thinking the clearest. º
Position Management – Don’t add to the Losers
How many times have you heard that you should buy more when your investment heads South? Reserve this strategy for your ONE stock. In short-term trading, if you thought a stock was going up and it doesn’t: cut your losses. If you don’t, you may not be trading very long. This is different than Investing (See The Inflection Point, Where Trading Meets InvestingTM). Displaying a certain timeframe’s Moving Averages can help give you points of reference for safe entries and exits. You want to seek out typical chart patterns like the Bear Rally. Don’t know what a Bear Rally pattern is? Check out the TIP100 video that breaks down the Bear Rally chart pattern. Think of the angle of the nine-period or 20-period Moving Average as the general direction of the trend at this moment in time. Identifying a full sine wave movement of price action may increase your confidence in identifying a pattern.~
Perhaps just as important as the price patterns is the consistency and range of price fluctuations over the last year. Did it move 30% overnight, then fluctuate a few percent the rest of the year, or did it rise steadily over the months? How often does the price return to the nine, 20 and 50 period Moving Averages? Are there any clear patterns throughout the months or year? Get more education on market trends on The Inflection Point Inc.’s website www.theinflectionpt.com.
Premeditated Entries and Exits – No impulse buying
Trying to get away with market murder? A flawless plan with triggers based on patterns is one proven way to bag a large profit in your market. Only six percent of people trying to profit in their chosen market will succeed. What sets these six percent apart? You may have guessed it: it’s their strategy.
The exact formula or call for action is predetermined with a target price and a stop loss price calculated BEFORE pulling the trigger. The plan is not everything though. Just because you have identified some land mines in your field, doesn’t mean you are clear to go. Quantifying your maximum risk for every step lets you comfortably decide if you are willing to accept the worst-case scenario. Predetermine your risk.
Options - Stop Buying, Start Buying & Selling
Options are a great way to offset risk; however, when misused they can be devastating. I fell into this trap myself when I first learned about options. I started by buying ‘Out of the Money’ (OTM) Long Calls expecting a huge price move up. Moreover, I would do this right before earnings, when the implied volatility of the option was greatest (meaning I paid a premium on the premium!). I lost everything on multiple occasions, and it wasn’t until I started studying successful entrepreneurs that I realized why.
A synthetic spread is a popular tool for industry professionals. It has two parts or legs. One example is the Bull Put Spread. It involves selling one ‘At The Money’ (ATM) Put Option and Buying the OTM Put Option. The result is a credit to your account in the amount of the difference in options premiums. Your maximum risk in a position is the difference in strike prices minus the credit you collected. If the position price moves up or sideways, you will keep the entire credit.Δ
Delta is a key number in options pricing. You can find the current Delta of any options on trading platforms like Trader Workstation from Interactive Brokers (Barron’s ranked #1 broker). Delta is the amount the option will move if the underlying security goes up or down one point. It also represents the probability the option has of finishing ‘In The Money’ (ITM) when turned into a percentage. It’s no wonder I lost everything buying OTM Calls. Most of them had Delta’s between 0.2 and 0.35 (20% and 35% chance of finishing ‘In the Money’). However, I learned to treat my failure as the seed of an equivalent benefit!
Not automating your exit… Set it and forget it!
It’s in our nature to express emotions of fear and greed which unfortunately have the strength to override our sound premeditated plans. Resist the urge! As soon as you place your trade, you can place one order with two contingencies: A stop order, and a target order. This will allow you to “set it and forget it!” The OCO (One Cancels Other) Order is designed to cancel the ‘other order’ when one executes. I show how to set OCO orders in my TIP100 Video Newsletter titled game winning layup.
* Mutual funds can be both safe and risky. By safe, I mean it could be comprised 90% bonds and 10% stocks. By risky, I mean 90% stocks and 10% bonds. Either way, without looking into the breakdown of stocks vs. bonds in a specific mutual fund (there are thousands), you won’t have a good handle on your risk. Volatility is a term used to tell how much something is expected to move. Past volatility is a good tell for future volatility. Past performance is NOT a good tell for the future performance.
º Consult a professional before entering or exiting positions in your market. Even after professional consultation, I recommend trading paper (fake) money to measure performance. You don’t need a computer to paper trade. I also recommend a trade plan.
~ Find the sine wave movement and the three patterns I use for short-term and long-term positions in my NEW book, “Creating Wealth While Serving Your Country – The Serviceman’s Guide to Wealth Creation”.
Δ Don’t enter or exit options positions without consulting with a professional.
Important Content Disclaimer
All published material is for educational purposes only. I recommend doing your own research. Consult a professional before any market actions. I am not a Financial Advisor or Investment Advisor; Reach out to me if you need an advisor and I can connect you with the appropriate professionals for your situation. The information provided does not attempt to quantify all risks associated with your positions.
Published 11 October 2017
The THREE things costing Service Members 30% of their Revenue
#1 Not position sizing for max loss…
There are many benefits to expecting to lose everything and accepting the fact that it is a real possibility. Let’s say you take a position, and the value of your position falls 50%. This is most likely true if you are buying something new, like shoes or furniture, for example. Odds are, you won’t find any buyers on letgo or facebook, at even half of the price you paid. The more time goes by, the further the value will drop unless it’s something unique. When you buy interest in a company, by way of purchasing shares, you need to calculate the maximum amount you are willing to lose. If you can’t stand to lose half, maybe you need to purchase half as much.
# 2 Ignoring the time value of your options
Your options (not just in finance) have extrinsic value and intrinsic value. Intrinsic value is the actual value of your option today. The market value of your options increases when the time until expiration increases. The time value is the extrinsic value, the value most Service Members ignore until it’s too late.
Let’s say you need a Halloween costume. In mid-October, the costume may cost $20 with free shipping. Come October 26th, you will likely pay a premium if you want it at your house in time. Come October 29th, it may be impossible to get it in time (Unless you’re a Prime member with same day delivery!). By not planning, you are forfeiting your time value in everything you do.
If you buy Call options (options to buy shares at a certain strike price price) in the financial world, you may sell the same number of options at a higher strike price to offset your risk to the downside. The extrinsic value (time value) is what you’re collecting. The pair of options, one bought and one sold, can be combined in the same trade order and recognized as a risk offset (as to not significantly affect your available equity) if you have the right broker.
These options combination trades are known as synthetic spreads. This is much different that writing a covered call. Writing a covered call involves possessing the underlying security, which ties up significantly more capital. Covered calls don’t make a lot of sense if you know how to use synthetic spreads to your advantage.
#3 Not reading Think & Grow Rich
This goes hand in hand with being prepared. I could give you the Holy Grail of creating wealth, but if you’re not ready to receive it, it will be useless. In this book, the author, Napoleon Hill, studied what makes someone successful over the course of a 25-year period under instructions of Andrew Carnegie, the richest man in the world at one time. Mr. Hill met with over 500 of the most successful businessmen of the time, to include Henry Ford and Thomas Edison.
Napoleon advises getting a pocket-sized planner that goes out at least the next two years. He urges carrying it with you, along with a pen, everywhere you go. Ideas first come in the impulse of a thought. If not written down, these thoughts can be lost forever. You phone is a great tool; however, it can easily distract you and avert your attention from what is most important.
The author advises writing down your one major desire in life in the beginning of your planner. Then, writing what you are prepared to give for this one major desire. Finally, he tells you to repeat these two things 12 times a day.
“Success is where preparation meets opportunity.”
~ Oprah Winfrey
My guess is about ninety seven percent of Service Members who read this won’t read the book. Of the 3% that do read it, less than 1% will believe in the ideas enough to buy a planner and carry it with everywhere. Ignore these fundamentals of business at your own peril.
Stay tuned for more tips to increase your revenue in your market and good luck with your executions!