The 100% Stock Secret
Imagine standing at a table, staring at a jar full of red, green, and blue marbles. The stakes are high, but this isn’t a casino game. It’s a test of your trading discipline.
At the beginning, you’re given a hypothetical trading account of $100,000. For each round, you must decide how much of that account to bet before drawing a marble.
Each marble you pull represents a possible outcome: green for a win, red for a loss, and blue for breaking even. You’re told that 60% of the marbles are green, 30% are red, and 10% are blue.
The game seems simple and you might even be tempted to think the odds are in your favor, but it reflects the harsh reality of trading. You can’t control the outcome of each trade, but you can control how much you risk on each draw.
Welcome to the “marble game,” a model designed by Dr. Van K. Tharp, a renowned expert in trading psychology and systems development.
In his time running this experiment when speaking to investment groups, he saw participants’ results range from bankruptcy to $13 million.
Those results demonstrate the importance of a crucial principle in trading: Investment success is not just about picking a winning investment, it’s about using position sizing to survive the losers by managing how much you lose when the inevitable losses come.
Similarly, deciding on a structured, intelligent way to exit your positions can limit your losses and have an even greater effect.
Let’s rewind to the late 1990s, a time of exuberance in the stock market, fueled by the rise of the internet and tech stocks. It was the dot-com boom, and investors couldn’t get enough of companies with “.com” in their names.
One of the hottest stocks of the time was Yahoo. By 1999, Yahoo’s stock price had soared more than 5,000% in just a few years – from 17 cents to nearly $90. Investors were riding the wave of what seemed like an unstoppable rise.
Then came the year 2000, and with it, the bursting of the dot-com bubble. Almost overnight, the tech-heavy Nasdaq began to crash, wiping out billions of dollars in market value.
Yahoo, once the darling of Wall Street, saw its stock price collapse, falling from a high of $89.44 to less than $10 within just a couple of years. Many investors were caught off guard, holding onto their positions with the hope that the stock would recover.
It never did recover and is now among a laundry list of “ghost tickers” that have been delisted.
Now, imagine a different scenario — one in which those same investors had used a simple risk management tool: the trailing stop. Let’s say an investor bought Yahoo at $15 in early 1999 and set a 20% trailing stop. As the stock soared to nearly $90, the trailing stop would have followed the price, adjusting upward as the stock climbed. When the stock began its steep descent, the trailing stop would have kicked in at around $71, locking in significant gains of more than 370%.
In this alternate history, the investor wouldn’t have ridden Yahoo all the way back down to $10, losing everything they had gained. Instead, they would have captured the majority of their profits and preserved their capital for future opportunities.
Trailing stops are a powerful way to protect gains while giving your investments room to grow. They move with the price of a stock, adjusting upward as the stock rises, but never down. When the price hits the stop, you sell the position, ensuring that you don’t lose more than a set percentage from the peak price.
In the case of the dot-com crash, investors who used trailing stops could have weathered the storm, avoiding the devastating losses that wiped out years of gains for so many. This historical example shows how using trailing stops isn’t just about protecting against losses—it’s about preserving your gains when the market turns against you.
By fine-tuning these two ideas – position sizing and trailing stops – we believe you can easily boost your investment returns by 100%.
Thus, position sizing and timing your exit is likely more important than what you’re investing in to begin with.
That’s why we’ve arranged for you to have a free account with TradeStops. It offers easy-to-use tools to strategically size your positions, manage your exposure, and determine your exit strategy based on each individual stock’s risk.
Below, we have a short introduction from the TradeSmith CEO Keith Kaplan, to get you started.
If you have any money in the stock market, chances are good that you’re unsure what you should be doing with your investments right now. It seems like one day, you see a headline striking a bullish tone. The next day, you’ll see the complete opposite.
With all the volatility we’ve seen in the market, there is a very good reason to be concerned that you may not be maximizing your portfolio’s performance in the market.
This is a time when fortunes can be made — or lost. The choices you make today could be the difference between seeing exceptional profits or getting crushed.
Keep in mind, I am not a financial adviser. I can’t offer personalized investment advice, and I don’t gain anything if you follow the strategies laid out in this report.
What I am concerned about is this: There are specific moves you should be making with your money right now. In this special report, we’ll look at three steps you can take to ensure that you’re maximizing your portfolio’s performance.
STEP 1: Learn How to Harness Volatility for Profit
Stocks move up and down as a natural function of the market. Harnessing this movement creates opportunities for investors to realize gains. But stocks don’t all fluctuate at the same rate.
Some stocks dip further and rise higher than other stocks, while less volatile (less risky) stocks don’t fluctuate as much.
Imagine knowing the amount of volatility within a stock before you buy it. That’s powerful. Understanding volatility means your decisions are based on research-backed information, not guesswork.
The challenge is quantifying volatility in any meaningful way.
At TradeSmith, we took this challenge head on and have developed a method to reliably quantify the exact amount of volatility in virtually any stock. Using this measure, you can compare one stock against another, aligning the volatility of your stocks with your investing goals to make better, more informed, and potentially more profitable investing decisions.
But how can we leverage the knowledge of a stock’s volatility to help produce higher returns?
Before we answer that question, let’s explore a powerful tactic to help you lock in and preserve gains while protecting yourself from loss.
You may have heard of a “stop-loss order” or a “trailing stop” before. It’s one way to protect yourself from losing too much money on a stock.
Many people use a traditional trailing stop of 25% for any stock they buy. But it’s such an arbitrary number when we know that some stocks are naturally more volatile than others.
For instance, a 25% trailing stop on a stock with a normal volatility range of only 15% would be much too large. On the other hand, a 25% trailing stop on a stock with normal volatility of 50% wouldn’t give that stock enough room to move and could result in missed gains.
So, the first step to maximizing your profits is to ensure that your trailing stops are adjusted to fit the expected volatility of any stock you’re invested in.
STEP 2: Minimize Risk Through Position Sizing
Depending on your investing goals, it may make sense to acquire some riskier investments with the opportunity to rise sharply in value. You’ll just need to be prepared for the possible fall, too.
Knowing the amount of volatility in a stock means you can watch it lose some value and not panic, because it fell within the “range” of its natural volatility. And, knowing your limits and what you’ll tolerate in terms of risk means you can use that expected volatility range to determine how much to invest in any stock.
By “position sizing” stocks for volatility, you gain greater opportunities to make more money while also taking less risk. That’s because understanding volatility means you know when to invest more in your “safe” stocks and less into your riskier stocks.
Imagine you have $10,000 to invest in two stocks. One carries a large amount of volatility while the other is relatively stable and doesn’t usually fluctuate much.
You might think that by investing $5,000 into each, you’re taking an equal amount of risk. But really, you have too much money at risk in the higher-volatility stock and not enough invested in the lower-volatility stock.
This is the power of position sizing based on a stock’s volatility, and it’s the second step to maximizing your portfolio’s performance.
STEP 3: Balance Risk Across Your Entire Portfolio
We’ve covered how to manage risk in individual investments, but what about your entire portfolio? The weighting for your individual investments within your portfolio can determine how much risk your overall portfolio carries.
For instance, when you sell out of one investment, are you suddenly overweighted in other investments that might put you at more risk than you realize?
If you know your individual stocks’ volatility ranges, you can use that measure to help you gauge and rebalance risk within your portfolio.
Just as you can position size individual tickers based on their volatility, you can use that same measurement to ensure that you’re taking the same amount of risk for every position in your portfolio — investing more into less-volatile stocks and less into higher-risk stocks.
While it might seem counterintuitive, you can increase the potential for gains in your portfolio and minimize the total risk that you’re taking on.
It’s a good idea to review the overall risk in your portfolio on a regular basis — pick a time frame that works for your investment philosophy — and rebalance if you find that you’re carrying more risk than you’d like.
Conclusion
Thankfully, you don’t have to crunch a lot of numbers on your own to achieve these goals. With your new complimentary subscription, you get free access to TradeStops, which offers the tools you need to track the volatility (also known as VQ) of any stock you own.
With TradeStops, you’re well on your way to protecting yourself from volatility, while still taking advantage of the gains that can be inherent with higher-risk stocks. You’ll be able to keep using these tools free of charge for as long as you maintain this subscription.
You should have received an e-mail about how to log in to your FREE TradeStops account. If you’ve already signed up, CLICK HERE to get started immediately.
Regards,
Keith Kaplan
CEO, TradeSmith