Building Multi R Trades
To outperform you must be in the best shares as they emerge from a low risk entry.
A defined line in the sand.
You will never buy a leading stock in a leading sector at a discount.
You will never be in the big moves from the leaders if your always waiting for a retrace.
The best moves don’t retrace.
If you only trade retraces you will be in all of the losers and none of the big winners.
Enter trades from the beginning of a move. Never after a big move.
When I hear value from one of the self proclaimed value experts on twitter I can usually guess what the chart looks like. Usually its beaten down after a huge run up from some meaningless promise of growth from a company that makes no profit.
All the way down it gets better value. AudioBoom springs to mind. 17p to 7p. It now has huge overhead supply and the best you can hope for is some choppy sideways trading for the near future if your lucky. Will it ever turn a profit. probably not.
So where do you find these great growth stocks that defy gravity. usually there right under your nose. Whilst AudioBoom was losing 50% of its value Howden Joinery gained 50%.
What drives a share price up 50% in three months? Accelerating Growth, that’s what.
Waiting for a growth share to become a value share and then buying is a dangerous game in my opinion. Usually it will still have growth but the growth will be decelerating and after an extended move.
You have to have a no nonsense attitude if you want to outperform in the trading game. You need to remind yourself why your in a trade and make sure it’s a good reason.
Good reasons for me – Accelerating growth from a defined base with no overhead supply.
Bad reasons are – Rumors of an RNS, Value without accelerating growth from extended moves. Deep retraces with overhead supply.
Value alone is not a reason for a share to outperform.
Howden Joinery Trade Example
Howden Joinery spent six months of 2014 consolidating and forming a multi month base.
On the 5th November 2014 it released an RNS that said “we now expect profit before tax for the year to be above market expectations” now market expectations were already forecasting accelerating growth so these must be good numbers.
Howden gapped up over previous resistance on the news and held the gap into the close on huge volume. A pro gap that didn’t fill (though at the time there’s no way of knowing if it will fill)
If a share gaps above resistance on good news there is no reason it should trade back below the previous low (309) so this is the right place to put your stop. you could of put it tighter still at 329 but for this example I will put stops on lows and buys on highs and you can see for yourself the power of adding to a winning trade at the highest prices.
5/11/14 Price gaps up on raised guidance. Entered next day as price held gap
Entry = (374) Stop = (309)
Risked 1R at stop.
21/1/15 Price closed above previous high of 418. Entered next day when price opened
Add 1 = (421.5) Stop = (381) under low of last retrace.
Risked 1/2R total at stop. Now Risking 1/2R to target 2+ (Reward to Risk of 4/1)
26/2/15 Price gaps above previous high of 440. Entered next day when price opened
Add 2 = (455.8) Stop = (407) under low of last retrace.
Risked Locked in Profit
8/5/15 Price gaps above previous high, Entered next day when price opened
Add 3 = (488.6) Stop = (437.8) under low of sideways consolidation.
Risked Half of Locked in Profit
All trading costs have been added but no dividends are added.
I’ve shown you how to add to winners whilst lowering your risk at the same time.
Starting with a wide stop and squeezing more out of the trade as it moves in your favor.
If you want to achieve positive expectancy with an average win rate (the best traders in history are only right about 60% of the time on average) you must add to winners and cut your losers. there is no way around this long term.
Losers add to losers.
Winners add to winners.
Losers take winners too early and hold losers too long.
Winners take Losers early and hold winners longer.
Losers take big losses and small wins.
Winners take big wins and small losses.
Losers try to get the cheapest price on something that is trending down.
Winners buy the high where there are no sellers.
You need to understand the math of trading before even stepping into the arena.
Below is a link to the no bs math of what you need to achieve just to break even.
Any questions you can find me on twitter here: @stealthsurf