Money and Risk Management Part 2

Limited stock selection

A second money management possibility is to select a limited number of stocks for trading. Personally I prefer this method, because it is much easier to follow up a limited number of stocks with technical analysis techniques.

With a fixed limited number of stocks it is possible keeping individual charts with specific notes over longer periods of time.

We can start with a fixed capital per stock. Assuming a starting capital of $25,000, we could divide this money over 20 stocks, each one of them getting a starting capital of $1,250.

Each of the 20 stocks is traded individually, with no profit or loss sharing. All profits or losses are only attributed to the individual stock. This means of course that each stock must be followed individually, because it can only use its own private capital.

Applying this kind of money management is very effective and has a number of advantages...

Look in the LOCKIT book for these advantages...

The find out the results using a portfolio with profit and loss sharing or no profit or loss sharing, we can run a test with the same stocks over the same period and the same buying, selling and cost of trade conditions.

Figure 9.1: List of stocks used for testing.

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We are using the list of stocks in figure 9.1and we are using daily prices over a period of about 6 years back in time starting end of September 2008.

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The test system I used is my automatic expert buy and sell system SATS. As such, for the purpose here the system is not important, what is important is the fact that we use the same system test under the same circumstances and time period. We only take long positions. For the first test we have a starting capital of $25,000 to be divided between the 20 stocks. But there is a profit and loss sharing. So each stock will get 5% of the portfolio value any moment in time.

The result with profit and loss sharing

There was an average of 25 trades per stock in the total time period.
The total profit is €128,872.

Figure 9.2: Test result with profit and loss sharing.

ATTENTION: the %Gain indication in the result table (figure 9.2) is the profit percentage compared to the total capital!

 

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