Anatomy of a Win

As I have said in the past money management is much more important than stock selection. If you can buy enough stocks (with good fundamentals, price breakouts and good volume) you should find at least the occasional winner. Let’s examine how money management can offset your losers with your winners.


A previous great stock (just an example) is NTRI. See the graph below courtesy of http://www.bigcharts.com/.

Lets assume we saw the high volume breakout at beginning of October and bought in the pull back (quiet period) at $17 per share and bought $100 worth of stock. You followed up with subsequent purchases at $18, $19, $22, $25 and $26 during each of those quiet periods after further climbs on volume. By the way the investor recalculates the new stop sell point after each purchase to make sure if the stop is hit then you sell out at zero overall loss. Of course you can raise the stop even higher to ensure you keep some profit. Ultimately the stock has high volume selling at the beginning of January and you sell half at $30 per share followed by the remainder at $28 per share as it continues down on high volume (the rest is history as the selling continues). Notice you don’t sell at the top $33 because you don’t know it’s the top until it has happened. You can never buy at the bottom or sell at the top. Try and sell at the top and it may continue rising. Look how many times we saw a new high during the period of this example.

The total profit is $282 and 28:1 is the ratio of the profit made to the initial risk of $10. Remember the original purchase was for 6 shares at $17 with a 10% (or less) stop price to guard against loss. As we buy more stock we ensure our new stop is a break even stop so maximum risk is $10 going to $0. Since we have a final profit of $282 then the reward versus risk is 28:1 (282/10). In summary after the initial purchase of $10 risk we are always in profit on later purchases and so risk is gone and we end up with a proportionally larger gain.

The ratio 28:1 means that for every 28 stocks we buy we are looking for 1 winner to break even. Of course you want to do much better than that and you also have to take commissions into account. However I am using a seed value of $100 and if the investor uses a larger seed then commissions can be considered negligible. Another way to look at this is that if you have $282 of profit you could go out and buy 28 more stocks each with $10 of risk and still have an overall risk of zero to your total portfolio. Think about it, as each stock in your portfolio becomes more profitable then you can buy more new positions at a faster and faster rate (in fact exponentially if you so choose). To conclude when the market turns up you can get into many positions at a very fast rate starting out with that tiny $10 of risk on your first position. If the market turns back down you step aside and make another new initial purchase at a later date.