Old habits are hard to break, but doing the same thing can lead to complacency. To get better you must always find ways to improve. If not, you become stale. There is an old saying, “Do what you have always done, and you get what you have always gotten”. If you are satisfied with your results, fine. Keep doing what you are doing; however, if you are looking to get better, then you must review your process. One way of doing that is by simply reviewing your past successes. What is working and why? Is there a pattern? Is there a profile? The last few weeks I have been doing just that with the stock pick recommendations that have been made over the last year.
With our swing trading method at twopercentgoal.com, our goal is right in our name. We are looking to earn 2% per week. If done consistently, you can double your money over the course of the year. I have looked at 187 recommended picks to go long this past year that met or surpassed the 2% target. I looked at the lowest intra-day low and on what day it happened. Of the 187 picks, 154 (82%) had its lowest intra-day stock price on the first day of active trading. Eighteen (9.6%) had its lowest intra-day price on day two; eight picks (4.3%) happened on day three; four (2.1%) happened on day four and three (1.6%) happened on day five. The evidence is overwhelming. When I have a successful pick that meets or surpasses its two percent goal, the lowest intra-day low will happen in the first three days.
A good defence is a good offense. This system is not perfect and the times that we are wrong we must minimize our losses. The way we do that is implementing a stop loss strategy. Our current strategy is to implement a stop loss at 3% of the entry price. This way we get out of the trade automatically with little damage done to our portfolio. But what if we could minimize those losses even more? What if we could come away with a 2% or even a 1% loss? How can we do that?
The answer is simple. If 96% of our successful picks have the lowest intra-day stock price in the first three trading days, adjust the stop loss to the lowest intra-day stock price in those three days minus one penny. We will have narrowed the gap and minimized losses even further.
A similar pattern exists with our successful short sell picks. I have not reviewed every successful short sell but there is more than enough of a sample size to show the same pattern. Thus far, we have yet to find a successful short sell where the intra-day high was beyond day three. The conclusion, when shorting, set the stop loss at the highest intra-day price in the first three days plus one penny.
Another point we found was simply this. We have yet to find a successful pick where there are three consecutive down days in a row and come back to gain 2%. There are times when we are wrong so if entering a trade and the first two days have gone in the wrong direction, put the stop loss one penny lower than the previous intra-day low.
Will this guarantee success? No. There are no guarantees in life. Will this improve performance? The stats show that it will. If you reduce your losses, you will inevitably improve your bottom line and that is what we are all about. Sign up for the daily email. It is free for the first 30 days and then $49 per month thereafter. You will see stocks poised for a 2% gain within a week as well as tighter stop losses with this methodology to minimize losses. Good luck with your investments.