There are many stop losses of late for obvious reasons as the market turned choppy as the nearer term trend broke and the breakout tries from the inverted head and shoulders could not hold. We like to keep playing setups that show themselves even at those times because the market can continue on and if you are not in the move you miss out. At the same time, because the trend is under pressure and the action is choppier we don’t take full positions on the upside plays but pare them down to half or less of what you would put to work on a particular play during a strong trend.
By the time we got to this point in the rally we were pretty light already in many positions because we have taken partial gains on the way up and on many we had our last part of the position on and were just letting the market take us out if it could not keep the move going.
As for the newer plays, those are the ones we are taking smaller positions to start with: the risk/reward is not as good as it was overall. It is still great on the individual plays, and that is what you always want on any play or otherwise it is not worth your money, but overall the market action is equivocal and that impacts individual plays, so we just don’t put as much money to work. Then if it doesn’t work out we get out without suffering much downside.
That is how we work money management: take partial profits at logical points (Fibonacci extensions, other resistance) but let part of the play keep running. That is how you get the 200%, 300% and higher gains on stocks that keep on running well past what you expected they would. If a play doesn’t work you limit the downside because the entry gives you a good stop point to exit on without burning profits. You will see that some plays we don’t enter even though they hit the buy point simply because the action prevented a good move such as a gap. If you keep to reasonable entries, let the positions that are winning run, get rid of those that don’t, then you make good money period.
Of late the stop losses and trailing stops outnumber all else, but that is a function of the market and getting out when support is violated on the close. You notice that the upside plays have naturally gravitated toward the healthcare, drugs and defensive areas that are getting money right now that is being taken out of other sectors. We also have the downside plays that make us downside gain and act as something of a hedge even as some upside plays continue to work or at least hold support. During this chop as noted last night we are looking for range-trading opportunities if SP500 can recover back into its trading range. Thus some QLD this morning along with the LAVA position. SP500 is having issues at the trading range bottom, however, so it may not pull off the recovery, and that will mean closing out some more upside positions and again looking to the downside and letting our current downside positions run, positions that we have already banked some gain on during this decline.
Hope that helps you understand how we manage risk. How much is put to work on each play, how much in trending times versus choppy times, entry points, stop losses, letting winners run, taking partial profits along the way.