Are You Selling Winning Trades & Keeping Losing Trades? Welcome to the Disposition Effect…

The disposition effect was discovered in the field of behavioural finance.

Wait, before your eyes glaze over this is important!

It demonstrates the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value. Or in plain terms, why you sell your profitable trades and hold onto your losing trades.

Surely that goes against everything you believe? Surprisingly not…

Hersh Shefrin and Meir Statman identified and named this effect, which found that people dislike losing significantly more than they enjoy winning.  Let’s put it a slightly different way, the emotional strength of losing is so much more powerful than the joy of winning. It has a much deeper effect on an individual to the point where they can subconsciously prefer the challenge of enduring losing trades!  

This is the Disposition Effect.

The disposition effect has been described as “one of the most robust facts about the trading of individual investors” because investors will hold stocks that have lost value yet sell stocks that have gained value, over and over again.

It’s important to be aware of it, because you can change the outcome. But when do you sell your winners?

This is what we have Dave for, enjoy the video!

Ask The Analyst LIVE: What’s Stopping You?

What if you could ask your burning question about trading?

What if you could ask the most active and successful share trading teams in Australia, what you want to know?

  • Would you ask about a stock, should you buy, hold or sell?
  • Do you always seem to hold your losers and sell your winners, and want to know why?
  • Does it feel you backing a trade is a sure way for it go out of business?

We are putting a LIVE webinar on THIS FRIDAY 22nd November at 2 pm A.E.S.T (Sydney, Australia time)

Whatever your question, bring it to the webinar and the team will answer it for you!

Join us this Friday, 22nd November 2019, LIVE at 2 PM AEST.

An Interview With Charlie Bass

 

We recently interviewed Charlie Bass, the founder of Eagle Mountain Mining ( EM2 ).

The company is presently finalising an exciting acquisition dependent on the outcome of a court case to be decided this Thursday in the US. Eagle Mountain Mining are confident that they should receive a successful judgement as the court case is hopefully a formality.

Enjoy the interview above with Charlie Bass, he is one of the most successful entrepreneurs in the resource sector in Australia.

Market Watch: 15th November 2019

 

Every so often, we let everyone have a look inside our daily Market Watch videos, so you can discover the inside track our members get everyday.

This is where 90% of the work is done for them, fundamental and technical analysis, ideas and actual buys and sells. Once the idea or recommendation is out, we follow that trade to its natural conclusion.

In this weeks video:

  • NXT – Time to enter this growth company?
  • BTH – Ready for the next leg up?
  • QUB – Sexy chart and ready to run next week!
  • AMS – Primed for a move up.
  • ALL – Time for a punt before they announce?

This is what it’s like to have a team of analysts working on your portfolio every day of the week!

How is your team doing?! We’d love to know…

PS You can access to our entire team for 30 Days for just $1! 

How Setting a Stop-Loss Can 10 X Your Returns

We’ve all lost money share trading. And it stands to reason that IF ONLY you could stop losing money, you would actually make a lot more.

It’s painfully obvious. But despite that the vast majority of traders DO NOT set a Stop-Loss on their trades.

It’s like jumping out of the international Space Station without your tether, literally nothing is stopping you from floating off into the vastness of space.

A stop-loss is designed to stop you floating into a black hole of loss.

You can make more money by losing less, but exactly how much more, and how much would you need to reduce those losses to make a difference?

Let’s break down

When you lose money trading, you need a greater percentage gain to break even.

For example, if a position declines by 50%, say from $40 to $20, that stock will have to rise by 100 percent (from $20 to $40) to get back to even.

That’s worth repeating:

A 50 percent decline in price requires a double to break even!

What happens if you keep your losses relatively small?

By keeping your losses small, you preserve your hard-earned capital for future investments.

The question is though, how do you limit your losses? 

And the answer is simple, use a Stop-Loss. But what’s a stop-loss I hear you ask?

Great question, glad you asked…

A stop-loss is…

An order placed with a broker to sell once the stock reaches a certain price.

A stop-loss is designed to limit an investor’s loss on a security position. Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%.

For example, let’s say you just purchased Microsoft at $20 per share. Right after buying the stock you enter a stop-loss order for $18. If the stock falls below $18, your shares will then be sold at the prevailing market price.

The Advantage

The advantage of a stop-loss order is you don’t have to monitor how a stock is performing daily. This convenience is especially handy when you are on vacation or in a situation that prevents you from watching your stocks for an extended period.

The Disadvantage

The disadvantage is that a short-term fluctuation in a stock’s price could activate the stop price.

The key is picking a stop-loss percentage that allows a stock to fluctuate day to day while preventing as much downside risk as possible. Setting a 4% stop loss on a stock that has a history of fluctuating 8% or more in a week is not the best strategy.

The Lesson

The lesson here is never to permit yourself to lose an amount of money that would jeopardise your account. The larger the loss is, the more difficult it is to recover from it.

Set an absolute maximum line in the sand of no more than 10 percent to the downside. 

If you can’t be correct with a 10% cushion for normal price fluctuation, you have a different problem to address. Either your selection criteria or timing are flawed or the overall market is hostile and your money should be parked safely on the sidelines.

The Bottom Line

Capping your losses can have a dramatic effect on your returns. 

The hypothetical table below shows how this strategy can turn a double-digit loss in a portfolio into a gain of more than +70%

Without

With

Just PURELY controlling your losses will change your trading almost OVERNIGHT.

Compound returns without a stop loss strategy -12.05%

Compound returns WITH a 10% stop loss strategy +79.89%

Convinced?

If you’re experiencing losses and you are trading WITHOUT a Stop-Loss, this is definitely going to have and impact on your results.

But a bad investment, is still a bad investment, but you will ONLY ever lose 10%.

Now you know how limiting your losses can drastically increase your returns, but what do you need to do before you set a Stop-Loss?

What you can do now

Buying the right stocks in the first place is a great place to start!

Here’s HOW you can solve that problem for just $1!

Weekly PROFIT – 17th September 2019

Each week we love to review the previous weeks performance and publish our results on the weeks BUY and SELL recommendations.

This does not include performance on:

  • Hot Stock averaging 19.57%+ over 4 weeks
  • Einsteins Trending Stocks (130+ Trading Ideas per month)
  • Or Daily Video specs that came out over the weeks videos…

Here they are!