Trading Methodology
Please come back later, as this is a work in progress.
Terminology
Timeframes:
VST: Very short term. Intraday to maybe 1 day.
ST: Short term. Typically days
MT: Medium term. Typically weeks, sometimes a few months
LT: Long term. At least months, if not years
VLT: Many years
LTBH: Long term buy and hold. Warren Buffet style holding strategy
BE: Break Even, typically refers to a stop level that represents no gain and no loss (your cost basis)
Free Ride: After taking enough partial profits on a trade to be able to ensure you can’t lose money on the entire trade (taking into account the stop on the remaining portion), the trade goes into “Free Ride” status. This is one of my favorite ways to manage risk at an account level. Even if you have small risks on every trade, if you have 20 trades open and the market takes a big dump, 20 small stop losses can still add up to a larger drawdown. Bringing trades to BE and “Free Ride” status alleviates this account drawdown risk.
Risk Management
Some of the greatest traders have consistently said that the most important discipline in trading bar none is good risk management. You can have impeccable prediction skills, the luck of a leprechaun, and the market on your side, but if you have bad risk management, you can still lose it all quite easily (I’ve seen this first hand!). Conversely, if you have great risk management discipline, you can have piss poor predictions, bad luck, and a market working against you, and it can still be very difficult to blow your account. Proper Risk management is the #1 thing to get right in trading, bar none. Nothing else comes close.
Position Sizing
Proper position sizing is extremely important to long term trading success, but everyone has a different risk profile though. So there is no 1 size fits all. Usually, you don’t want to lose more than 1-3% of your overall account if you get stopped out of a trade, depending on how confident you may be in the trade. Very high confidence trades that risk 5-10% of your account should be relatively rare and reserved only for “AAA” trades. These are just guidelines I go by. I have a spreadsheet to calculate position size here (TBD-insert link)
Some folks may swear up and down that these guidelines are too strict, and they need to risk much more than this to grow a smaller account quickly. Fine, but the most important rule is to have a % guideline range that works for you, and stick with it, and I would argue even for small accounts, you generally should not risk more than ~20% ish of an account MAX on any one trade, it’s just too much setback if you stop out. A 20% account drawdown is a big deal.
The Math on Recovering Losses
If you lose 50% of your account across 1 or more trades, the important thing to realize is that it will take a DOUBLE to get your account back to even. That’s a 100% gain, not a 50% gain. Big account drawdowns are crippling to a trader. This leads us to the next super important rule for risk management:
It is FAR more important to avoid losses than it is to get gains.
eg avoiding a 10% loss is far more important that getting a 10% gain.
The bigger the potential loss, the more important it becomes to avoid it. For instance, some of the Great traders like Mike Minervini suggest no more than a 10% stop on any single stock trade.
Reward to Risk Ratio
TBD
Stop Losses / Trade Management
TBD
What is this Dividend Income Model Portfolio for?
I’m glad you asked. This is my personal way to generate 1 passive income stream, which is highly regarded as a top priority in long term wealth generation. I recommend having as many passive income streams as possible, and my dividend portfolio is one of mine.
The basic idea is simple. I take a portion of my profits from swing and core trading, and I roll those profits regularly into the Dividend Portfolio account as new cash. I will then add new dividend generating positions at strategic times using this cash, or I will average into existing names to hopefully improve my cost basis. The LT goal of this is to generate large amounts of passive income every month/quarter. A 2 million dollar account averaging just a 5% dividend can give you 100k gross income of spending money per year, which is enough to entirely pay for a modest lifestyle unless you have a large family (for now at least lol).
My general rules of the Income Model portfolio are:
This is a LT account, focused on reliable income payments. Income is absolutely the 1st priority. Growth is a relatively distant 2nd priority.
I only invest in companies I believe in, that have reliable dividends, and even better if they have reliable dividend growth.
Absolutely NO stops. This is Warren Buffet style holding strategy. If I get a large drawdown on a stock, it’s a candidate for averaging in to improve cost basis and get a better yield. Just like Warren Buffet, I can and will trim positions if they get overvalued or extended. But I will only outright sell for 2 reasons:
I no longer feel the company has a bright future, and therefore I believe there may be a reasonable risk of dividends being cut in the future.
Absurd valuations that on the order of bubble territory.
Focusing on income means I still will consider valuations when entering new positions. When a stock is near a major low, the yield becomes more attractive. So that’s another reason to focus on yield (income), as long as that dividend is easily maintained.
How much profits you roll into the Model income portfolio is subjective. The better profits I make, the bigger the % of those profits I generally roll into the LT account. This ensures winning streaks in trades will increase my LT income stream proportionally.
Bottom line: You don’t have to use the model income portfolio if you don’t want to. I’m sure many folks just want the trade setups and analysis. But I’m providing it as an illustration and role modeling of how I generate wealth. Additions and updates to the income portfolio will be infrequent as you might expect.