Are You Asking the Right Questions About Stock Trading?

‘Successful people ask better questions and, as a result, they get better answers.

Tony Robbins

I think Tony’s right. A well thought out question requires a thoughtful response. It’s no wonder some people are successful…they have an information edge on the rest.

One of my favourite parts of Quant Trader is the Q&A. This is where you direct the learning. It’s where good questions can help you become a better trader.

And it’s not just the person asking that benefits. Some of my best learning experiences are from questions I never thought to ask. It often pays to listen when your classmate raises a hand.

So what is a good question?

Well, for me, that’s easy. One that makes the recipient think. This often brings out the best answer.

The email I’m about to share certainly fits this description. You see, I couldn’t quickly offer a meaningful response. I first had to do some research.

It also required more than a few words. As Tony said, better questions get better answers.

Have a read below…

I’ve been a subscriber to Quant Trader since its inception in November 2014 and I’m extremely grateful for the lessons learned from you. 

I bought my first shares on the ASX in May 2013. Prior to Quant Trader, I set my trailing stop loss signals at 50%, as per the recommendations of many PPP editors. I was new to investing on the stock market and didn’t really know when to exit a stock. 

I found that holding onto stocks too long was costing me money. But you’ve now shown me the way forward — thank you. I now set my trailing stops at about 25% to give a stock “room to move”.  I now understand moving averages and use the same 50/100 days combination as Quant Trader.

Since learning from you, and following Quant Trader signals, I’ve bought a total of 24 stocks. I’ve invested $32,000 in these and made $8,250 profit (25.73%). My losses are only $500 from three trades. 

I originally invested $1,000 per trade as you recommended. Now I’ve pushed this up to $2,000 as I’ve gained experience and made more money through investing alongside PPP recommendations.

Now, I need to learn about the overall benefits of selling half of a winning stock, while letting the remainder run. Several PPP editors have proposed this strategy. 

Here’s an example of one of my own trades — a 10-bagger in LNG Ltd. I bought my first $500 worth of shares at $0.19 in May 2013. I later bought four more lots at different times between $0.28 and $0.335. My total investment was $2,508, or 10,000 shares. 

The stock hit a high of $4.45 — a 2,347% gain from my first shares bought at $0.19! I sold 5,000 shares at $3.35 in August 2014, and then 2,500 shares at $2.06 in December 2014. This resulted in a $22,000 payout. I eventually sold my remaining shares for $2.65 in August 2015. The total profit from the trade was $27,855. Nice — thank you, LNG.

I don’t expect you to give personal advice. But I’m sure other readers would appreciate your comments on the strategy of selling half of a winning trade.

Finally, I would like to say that I think Quant Trader is a marvellous service. I have learned a huge amount since Nov 2014. Thank you.

Member, Peter

I really enjoy this type of email. It gives me a glimpse into the mind of an up and coming trader. I also get to see how their trading style is evolving. This is something that fascinates me.

Peter’s been trading shares for three years. He’s rapidly improving his skills with the help of various Port Phillip Publishing services. Leveraging off the experience of others is a smart way to learn.

I’m going to address several parts of Peter’s email. But I’ll do it over two weeks. There’s too much to get through in one go. I also think learning is easier when it’s broken into smaller chunks.

When do you sell?

OK, let’s start with exit stops.

Many people say that good entries are the key to trading success. But I disagree. I believe your exits are more important. This is what determines if you make a profit or loss.

There’s no single best strategy for setting stops — it all depends on your goals.

For instance, a short term trader may use tight stops. This means their exit point is never far away. But if you’re targeting medium term trends, then a wider stop will often be better.

Quant Trader uses an initial exit stop of 25% for long trades. I find this is a good balance between avoiding unnecessary exits, and limiting downside.

Some traders will use an even wider stop. And that’s fine too. The key is to make sure your potential upside is greater than your risk.

I generally look for a reward to risk ratio of about 3:1. In other words, for every dollar of risk, a stock needs the potential to rise by $3. This helps me avoid marginal trades.

The next step is to set a trailing stop. This is an exit point that moves higher as a stock rallies. Many traders use a fixed percentage, say 25%. If a stock falls by this amount, they sell.

Quant Trader has a different method for calculating trailing stops. It uses a multiple of a stock’s recent trading ranges. This is a dynamic process that tailors the stop to each trade.

Peter makes an excellent point. He says ‘I found that holding onto stocks too long was costing me money.’ I know what he means. This is a lesson every trader learns.

There are two situations that can cost you dearly:

  • A losing trade that continues falling
  • A profitable trade that turns lower, and keeps heading down

This is why your strategy to sell is vital.

A popular trading strategy is to sell half your stake on the way up. This increases the chances that you make a profit. It’s a little like having an each-way bet.

Trading a super trend

Peter gives an example of selling half. It’s his own trade in Liquefied Natural Gas [ASX:LNG].

Here’s what it looks like…

[click to open in new window]

Now that’s a trend. It’s the sort of trade that can make your year.

I’ve marked Peter’s entry and exit points on the chart. You’ll also notice a red circle on the chart. I’ll explain this in a minute.

Peter doesn’t give a reason for his exits. But he’s done very well. He sells half on the way up, then exits the balance as the price falls.

It looks easy in hindsight. But it’s a lot tricker in real time. I’m sure many traders sold all their shares early, and others held on for the ride down. I’ve seen it happen many times.

Selling half worked for Peter. It let him lock in a profit and reduce risk. He was also able to maintain an exposure to LNG. This was a good outcome.

So, what if Peter just relied on a trailing stop?

Let’s have a look…

[click to open in new window]

This is how Quant Trader would have managed this trend. There is only one exit point — the trailing stop. This is the red line that tracks below the share price.

Quant Trader exits LNG at $3.01 in October 2014. I’ve also marked this spot with a red circle on the previous chart. This should help give the respective trades perspective.

Let me show you Peter’s exits again:

  • Sold half at $3.35 in August 2014
  • Sold a quarter at $2.06 in December 2014
  • Sold a quarter at $2.65 in August 2015

Peter’s average selling price was $2.85.

Does this mean trailing stops are better than selling half?

Well, this is just one trade. I want to see many examples before making a conclusion. I’ll talk more about this next week.

But I will say this. I believe holding on too long is a mistake. It increases the odds that you ride a big winner all the way back to the bottom.

Fortunately this didn’t happen to Peter — although his second exit was 54% below the peak. I believe this is too much. It needlessly surrendered a big chunk of profit.

There’s no magic formula when it comes to exits. Some will be better than others. But there are strategies — like those that Quant Trader uses — that can improve your overall outcome.

Until next week,


Editor’s note: Exit strategy is one of the most important decisions you’ll make. Yet, despite its importance, selling is an afterthought for many traders. This can be a costly mistake.

Quant Trader uses a stock’s recent volatility to determine when to sell. This tailors the exit level to each situation. It’s not just about holding on to winners longer. It’s also about getting you out when the trend turns lower.

So if you’re not sure when to sell…I strongly suggest you look into Quant Trader now.

Try it. See if it makes sense to you. It could change the way you trade forever.

PS: Quant Trader sources, and retains the rights, to all images in the above article.

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.

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