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Stealth Trader – Black Swans

Swing Trading Large Caps – What is the Risk?

The main risk when swing trading is a gap down on earnings or a broker downgrade. You WILL get caught out many times by surprise announcements so you must limit the damage that can be done. I buy pilot positions so I have half a position risk and if it moves in my favor I add to my position. My pilot is 1/2% of my account. At any one time I like to keep my total position heat under 5% if all stops get hit.

I only take long trades in a bull market. There are more gaps to the upside in a bull market which will more than offset gaps to the downside. When I do short a large cap I use a guaranteed stop and only short FTSE100 blue chips. FTSE250 company’s have a greater risk of being taken over which happens more often in a bull market. Guaranteed stops are cheaper on large liquid company’s and the small cost of a guaranteed stop pays for itself when your stop gets hit as you have no slippage. You can also hold through earnings with a guaranteed stop. It’s a great feeling when you build a large position and get your stop to breakeven before earnings.

Futures and FX – What is the Risk?

Gaps of 100 points or more are the norm when trading an index. You can buy a guaranteed stop on the FTSE100 for 1 point. Just one news spike would cost you many multiples of this and again it will pay for itself many times over when your stop gets hit with no slippage. You also sleep really well at night when you’re holding a big trade. The same goes for FX. Huge news spikes of 100 points or more are common and then the big Swiss Franc move!!!

Stops – Always put your stop order in before your trade. Always, unless your account lets you put them in together. If the market makes a big move before you get your stop in you will lose big but if you enter your stop first and the market moves against your trade direction you will be stopped into a trade in the direction of the big move and could profit from it.

If you own 200 shares of Whitbread at £48 then most you can lose is £9600. A bad news announcement can cut a share price in half. Can you take that heat? Building big positions in a trending FX pair can reap huge gains but without a guaranteed stop you can go bust. Lose your house bust!

Small Caps – What is the Risk?

Huge gaps on news happen all the time on small caps. I trade the wide monthly swings and only trade shares that are rising on a monthly chart. I have stops under prior lows that can be up to 30% and I risk 0.8% of my account on the trade. Large monthly base breakouts work very well on small caps but most people struggle to buy them. Everyone is trying to pick the bottom on AIM shares and nearly everyone loses. Some brokers offer guaranteed stops on small caps and I will use them if the setup enables me to get a really tight stop but usually I buy the shares.

Micro Caps

All Risk, every penny you put in a micro cap is risked. Full stop. I trade micro caps often but they have the least risk on my portfolio. 10% of my account is available for micro caps. I only trade charts that are rising on the monthly. I risk 1% of my account per trade and stops are under the lows and usually 50%. Sometimes I just buy 1% of the account in shares with no stop so if the company goes bust I lose 1%. When I get 100% to 200% I will always de-risk so I have a free trade.

My Account Breakdown

Large Cap Position Trades – 25%

Large Cap Swing Trades – 20%

Small Cap Growth – 45%

Micro Caps – 10%

Compounding

I use fixed fraction growth and compound all profits. When I get that big trade that comes around every now and then I only compound half of the profit. The other half gets withdrawn for living expenses.

Spread Betting Accounts

I only leave enough money in these accounts for margin for obvious reasons. If the company goes bust you lose less. The spare spread account money is put in premium bonds and on average you get a win every month if you’re fully invested. I got three wins of £25 this month. Better than any bank.

Market Phases

You will find that the market is better suited to a certain trade style and forcing swing trades when the market is choppy is pointless. Buying small caps when the index is retracing after a big move is risky as the second half of 2014 was. Recognizing these market phases is easy on a monthly chart. Just sit back and wait. When the quality small caps start breaking out of bases its time to dip your toe back in the water.

This is how I spread my risk. It’s not perfect and it’s not for everyone but the idea is to stay in the game long enough to start reaping the rewards and live a life where you’re free to come and go as I please. Good Luck!!

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