Category Archives: Education

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!

Penny Stocks or Losing Money On The Stock Market The Easy Way…

I just had a call with a potential member looking to “win big” (yes they said that) with Penny Stocks.

This article is long overdue.

We’ve got an astounding country full of amazing companies, doing incredible things, earning money and increasing their value.

Every. Single. Day.

Every single day we get between 5 and 15 people tell us how they’ve found this unbelievable company trading for 3 cents. It is massively undervalued and is going to change the world, and double, triple and quadruple its value and their owners finances along with it.

Unbelievable is the word.

Mostly because “a friend told them”, “I found the CEO on a forum and told me about it and said to keep it to myself”, or “it was inside a Christmas cracker”…

The Penny Punt

That last one was an exaggeration, or was it?

These are otherwise known as lottery tickets, a punt or universally known as a Penny Stock, or more truthfully as a Penny Punt.

Jordon Belfort, a pillar of virtue in the investing world, had the most straight forward reaction to this in the Wolf of Wall Street when he said…

Jordan Belfort: Six cents a share? Oh, come on. Who buys this crap?
Dwayne: Well, I mean, honestly mostly schmucks. Postmen, there’s always postmen. Uh, plumbers. Um, they see our ads in the back of Hustler and Popular Mechanics, and our ads actually say they can get rich quick.
[he laughs]
Back to the phone call.
A new member wanted a call back and mentioned in a note that they were going to focus on Penny Stocks as a way to learn how to trade.
As he had a smaller amount to trade with, he’d decided to pick the most volatile and dangerous area of trading to start learning from. An area where even the most expert of experts have real problems finding profit.
Why you take risks in share trading
But psychologically, when you look at how we work as humans and the nature of Penny Stocks, you can understand why people are drawn to it.
Think about it, everything we are told is good sets us up to buy these stocks! We KNOW, LOVE and are excited by the things below:
  • Cheap is good
  • Small investment for a HUGE potential return
  • I heard it off a man/woman, who knows the CEO
  • I have to get in now
Let’s look at the reality of this…
Cheap is BAD (mostly)
Cheap means the company has no value, it’s likely to fail, bad product/service, falling or zero revenue and has no trust in the market that they will succeed. Without the background knowledge of the fundamentals, all you  see is cheap, usually coupled with “it’s hugely under-valued”.
IF it is undervalued, and forms what we would call a Contrarian play then its an opportunity then this is a great potential. But less than 5% ever do the work to uncover this.
Small Investment = HUGE Returns 
If you constantly focus on big returns you’d generally be trading volatile stocks (big ups, big downs) with all your capital in one stock you want to get the most upside. Big risk, big return right?
The majority of people in this situation will not know when this risky trade is at its peak, as they are focused  on more. You’ve taken a big risk, so you deserve your big reward right? Those in the know, or who know what they are doing will start to sell pushing the price down.
Meanwhile you are waiting for it to go up again and are not interested in taking “just” 10/20/30%. That was actually your chance!
This approach is compounded by the perception that trades like this are once a year or a lifetime. Of course this depends on how it has been sold to you, usually by the friend that means well and wants to take you with them on the “ride of a lifetime”.
With 2100+ companies on the ASX, less than 4000 on the NYSE and 15,000 traded over the counter (not on a major exchange) there’s no shortage of stocks to trade.
If you act on what you are told and not on what you know, you will fall for this every time. Especially if you believe the only way you can get ahead in trading is with BIG upside.
You will take riskier and riskier trades with more and more of your portfolio until you lose everything. Finally your share trading exploits become a cautionary tale that comes out at pubs/dinner parties as a warning to anyone about getting into share trading.
Sound familiar?
I heard it from someone who knows the CEO
Oooooh forbidden knowledge that NO ONE ELSE knows, sounds fantastical!
The reality check here is that the train has long since departed the station. Unless you are actually in the circle of influencers, the power brokers, the network with net worth then its incredibly unlikely that you’ve heard anything exclusive, profitable or even true.
Please don’t fall for it, especially if that news source is from your local tavern or especially from a forum where companies sinking go to start rumours to grab some cash before properly sinking and taking you with them.
If you’ve heard it on the grapevine, then you are most likely the grape closest to the ground that’s going to get eaten by a rat.
Act Now or Miss Out
If you are someone who gets emotional or excited quickly be aware you are the perfect person to get caught buying low value shares and losing money.
Getting carried away, jumping in on trades without research is a great way for lower-value businesses to sell you their cheap stock before tanking.
Con artists have been using this as a means to seperate people from their money for 1000’s of years. Self-awareness is one of the most powerful tools in your arsenal, right next to your own research.
So what should you do? 
Good question. If you cannot control yourself don’t trade shares full stop. If you do, do not trade Penny Stocks looking for “quick wins”.
This all comes down to common sense, hard work and valuing your money, which is why 90% of people will never follow this advice.
If you are happy to at least do some work or invest in companies doing the majority of the research for you but also invest in your own knowledge to cut down the time it takes to become proficient.
Be realistic.
If you are not a natural researcher, reader, numbers person or have any interest in being so – you will not be this overnight or ever. If you’re not passionate about exercise and get a gym membership because you know you should, how many times do you go? Never, maybe once to prove you can!
Maybe just reading this far was a struggle, but since you did, here is your reward.
The secret to your share trading future…
You do not have to research 5-10 hours a day to make money in the market.
We have members doing this on 15-30 minutes a day, others spend 5-8 hours a day but it’s their choice to spend that much time doing it.
Use your common sense, invest in your knowledge and understand how the charts and markets are moving. Most of all do something that gives  confidence in your knowledge to take action with the resources you have at your disposal.
The most successful members are taking 5%-15% every week or two, every month throughout the year. Who needs a HUGE return once a year when you can get real, regular returns every week or so?
If they can, you can. You just have to choose to.
Leave your gambling at the track, focus on your education to make smart investment choices and value your money enough to not trust “tips”, especially those from friends.

Are You Preparing For The Coming Market Correction Like Thelma & Louise?

Share Trading Thelma & Louise

Sorry to be the bearer of bad news, but another market correction is coming.

You may have heard rumblings on the topic, in fact we told our members last week exactly when we expect it to happen and areas of potential risk,  focused on reducing exposure and increasing opportunity.

But before you phone a friend and jump into your car heading for the nearest cliff, there are a few things you should know…

Every time this happens we the same responses to being pre-warned about a coming correction:

  1. Does not believe it’s going to happen, does nothing
  2. Knows its coming but unsure what to do, does nothing
  3. Instantly starts taking action in line with their strategy, just right
  4. Immediately sells everything going up, sideways and down, does too much

Small or large movements in the market, up or down creates opportunity for those prepared for it. There’s nothing more boring than a stagnant market that sails sideways for months.

What is a correction?

Let’s start at the most obvious place, because truly understanding something helps you can shed your fear of it and it stops controlling your actions or inactions. Making you less likely to act on emotional decisions and stick to your plan.

A correction is a good thing (depending on your preparation). 

While there is no official definition for this, a drop of 10% from market highs is generally considered a correction. 

Given the inevitability of market pullbacks, it’s important to have an investment plan you can stick with through market ups and downs. Active investors should think about exit strategies during market volatility.

The sell-off could be driven by concerns that earnings growth, while strong, may be peaking and that economic growth has been slowing in the U.S, China and other parts of the world.

So with a correction around the corner, it may be time to brush up on what corrections have typically looked like, and what action you want to take to protect yourself.

How long and deep will this correction be?

No one can predict the timing or depth of a stock market correction with certainty.

What we do know is that they have historically been a standard part of investing. In fact, since 1920, the S&P 500 has on average experienced:

  • 5% pullback 3 times a year
  • 10% correction once a year
  • 20% bear market decline every 3 years

While it may be unsettling, it’s not unusual to experience a sell-off of this magnitude.

Note: Corrections are declines of 10% or more, while minor ones are 5%–10% (all in blue shades above). Bear markets are declines of 20% or more (in the red shade above). Source: Active Trader Pro®, as of October 28, 2018.
Stock market corrections happen regularly

One thing that is worth remembering is that the market typically recovers pretty quickly from correction.

The chart below shows the largest drop from a market high in each year (blue dot). You can see that it’s not uncommon to have significant market declines. But the market still usually recovers and produces positive results for the year (shown as the bars).

S&P 500® Index annual total returns and intra-year declines: 1980–2018

S&P Index
Past performance is no guarantee of future results. It is not possible to invest directly in an index. Returns are based on index price appreciation and dividends. Intra-year drops refer to the largest index drop from a peak to a trough during the year. For illustrative purposes only. Data as of 9/30/2018. Source: Standard & Poor’s, Bloomberg Finance LP.
What does it mean for investors?

There’s a phrase that outlines this perfectly – Amat Victoria Curam, otherwise known as Victory Loves Preparation.

A market corrections level of impact on your portfolio is directly related to your level preparation for it. Everybody trades differently but so much the same as well…

1. Long-term investors: Stick to your plan

If you are saving for retirement or another goal that is years away, the time to consider how much of a loss you can handle isn’t during a correction. Consider the appropriate risk level for your portfolio when you are looking at your long-term goals, and think clearly about your financial situation and emotional reaction to risk.

If you haven’t created a plan, you should.

If you have a plan, it’s worth checking in that your investments are still in line with that plan. And does it continue to reflect your investment horizon, financial situation, and risk tolerance. If all that is so, you will likely be in a better position to manage the ups and downs of the market. If your mix of investments is off track, consider rebalancing back to a more neutral positioning.

2. Active investors: Be ready

While most investors who have a long-term plan probably don’t need to make any portfolio changes in anticipation of a spike in market volatility. Some more-active investors may want to take action to prepare for more volatility. That could mean setting exit strategies on current positions, using stop loss orders, or tracking technical indicators for signs it’s time to sell.

More active investors might also want to consider having a cash reserve, and creating a watch list of stocks to consider buying at certain price points, to prepare for buying stocks during the downturn.

3. Retirees: Manage your income

For retirees, who may be relying on their investment portfolio for a portion of their income, a market drop can present a different kind of challenge. Hopefully, retirees have an income plan that is built to withstand different market conditions. If so, you really won’t need to react to a short-term market move. If not, it may be a good time to sit down with an advisor to discuss you strategy.

The bottom line

Market corrections are inevitable, like death and taxes. 

While we don’t know if this will be short-lived or the beginning of a bigger downturn. History shows that the market recovers quickly from corrections, and most sound investment strategies are built to withstand volatility.

As a result, long-term investors should stick with their plan, and not take on any hidden risk.

So turn off the engine and drive away from the cliff, now is not the time! Want the inside track on this?

If you are not getting the Thelma and Louise reference, shame on you and here's the final scene of the movie! Spoiler Alert! Best to watch the whole thing before this though...

What you need to know about Capital Gains Tax on shares

Buying and selling shares and other listed securities can involve Capital Gains Tax, but what do investors need to know when it comes to tax time?

Don’t ignore it and definitely prepare for it, the ATO never forgets and neither should you!

Capital Gains Tax (CGT) is a term you’ll often hear as tax time draws near. Here’s the basics of CGT, when you’re required to pay it and what happens if you make a capital loss instead of a capital gain on your shares.

Basically, if you buy shares for one price and sell them for another price then the difference between the two is your capital gain or capital loss.

In the event you receive more for your shares than you paid for them, you’ll have made a capital gain and you may need to pay tax on it.

How much tax will you pay?

The amount of tax you pay on your capital gain depends on a number of things, including how long you owned the shares, what your marginal tax rate is, and whether you have also made any capital losses.

Your marginal tax rate is important because your capital gain will be added to your assessable income in your tax return for that year.

The length of time you hold your shares is relevant because individuals can usually discount a capital gain by 50%, where you have held the asset for more than 12 months.

What is a CGT event?

Selling shares and some other assets such as an investment property, or disposing of them to someone else, triggers what’s called a ‘CGT event’.

The CGT event marks the point in time at which you make a capital gain or incur a capital loss.

Other CGT events could include when a managed fund in which you own units distributes a capital gain to you.

What happens if you make a capital loss?

You would make a capital loss on shares if you sold them for less than you paid for them.

But what’s important to note is that if you make a capital loss, you can use it to reduce a capital gain in the same income year.

What’s more, if your capital losses are greater than your capital gains, or if you make a capital loss in a financial year in which you don’t make a capital gain, you can generally carry the capital loss forward and deduct it against any capital gains you make in future years.

What happens if you have inherited shares?

A CGT event is triggered only when you sell inherited shares.

If the person who passed away bought the shares after CGT was introduced on 20 September 1985, then the person inheriting the shares will also inherit the cost base of the person who bought them at the time they want to sell the shares.

If however, the person who passed away acquired the shares before 20 September 1985 then the person inheriting them is said to have acquired the asset at the time of death, so the cost base will be the market value of the shares at that time.

What next?

We are not tax experts, seek out the expertise of a tax professional to establish what your personal exposure is, we hope this helps…

Are you trading like a gambler?

Speaking to between 80 to 100 Australian share traders every day gives us an amazing perspective on our own trading and members challenges.

We’ve heard most share trading problems over the last five years from your  stumbling blocks, reason you’ve stopped/started, failed, gave up, profited or lost everything.

But gambling is a recurring theme that even the most experienced traders display. From the language they use, how they trade and most dangerous of all, what they do.

There are a few signs you are gambling, even if you think you’re not, many of us are and do not even realise it.

Here are 6 gambling habits we see EVERY day…

  1. Going ALL In: if you’re putting all your money into a single stock this is the number one reason most people lose their trading capital.  Trading more money multiplies the “win”, but also multiplies the risk. It may seem great now but there are literally a 1000 reasons why the stock would do the exact opposite of what you expect.
  2. Free Tips: free tips are worth what you paid for them, they are generally provided with an agenda behind them or through good intentions from friends who want you to come on the journey with them. If you are not doing the research yourself or paying for properly researched information don’t expect to be given free gold.
  3. Buying Cheap Stocks: Penny Stocks are the lottery tickets of the share trading world, but pay out even fewer times. They are cheap for a reason, stop looking to buy “bargain stocks” if they lose 9 times out of 10 (and they do) there’s no bargain to be found at all.
  4. Big Money on Short Term Trades: heard some hot news? Did you put a wedge on it doing what it says it’s going to do? A famous quote by Benjamin Graham says – “In the short run, a market is a voting machine, but in the long run it is a weighing machine.” This means that difficult to predict market psychology or sentiment as this drives the market in the short term, not common sense or even proven numbers making it difficult to predict its movements.
  5. Following the crowd: you can get swept up in what everyone else is doing, mostly by the time you find out it’s too late to make anything out of it. If you’ve read a trade is worth getting into on a public trading site it’s already too late to profit from it. Unfortunately most people come in when the movement is losing momentum leaving them with shares bought at the top of it’s worth with a loss waiting to happen.
  6. You’re Always in High Risk Stocks: always making high risk trades, penny stocks, speccies or volatile industries like mining, iron etc as high risk is high reward right? NO. HIGH RISK IS ALWAYS HIGH RISK! It’s only occasionally high reward.

Other signs of gambling includes trading as you “need money”, or are wanting to “make money fast”. If this is you then it will help you make all the wrong decisions at the perfect time to lose your trading capital, especially if you combine this with any of the above “trading methods”.

And of course using money earmarked for other things to do it with, or worse getting loans or finding ways to make a trade via credit cards is a major red flag.

If you trade like this please stop now.

Take stock and change the way you trade, this will also change your results and reduce your blood pressure.

The problem is that you “won” and took some profits like this at some point, and because it worked for you this has now become how you trade.

When you lose, and you will at some point, it will be big and it could take you out of trading completely.

Now, let’s watch Dave talk through the difference between penny stocks and high-value medium-risk, 3 YR Growth stories.

 

The Art of the Trade

The Art of the Trade is how we combine simple logic, common sense approach all while avoiding the one thing that affects more share traders profit that anything else…

Greed.

Greed will kill your portfolio profits every time.

When you win you want more and hold longer than you should, or put in more money when you should be taking profits. When you lose we see people chasing losses with more money, and selling winning trades and holding losing trades hoping they come back instead of cutting their losses or having stop losses in place to protect them.

No one reading this has not fallen into one of these traps, I know I have.

Share trading can be simpler than you believe it to be, IF you keep it simple. The market has an interest in keeping it complicated leveraging services to

That’s not to say that it is not extremely difficult to do what we do every day, but anything repeated hundreds of times a day over many years doesn’t just become better, it becomes instinctual.

But that’s the point, not everyone can individually review 500 – 700 companies a day and have the luxury of doing it with a team that are you friends that all bring different disciplines to every decision we make as a team.

Watch the video.