My head is stll pounding. Not from the bleeding of the stock market, but from having too much sake last night. I must admit that sake kept me away from the stock market and only this morning did I realise that stocks bounced back after falling sharply in response to a disappointing jobs report. Well, I am happy to know that it has stop hemorrhaging like it did yesterday despite of news that private employers slashed 263,000 jobs from payrolls during September struck stocks with weakness. Economists, on average, had expected job losses to total just 175,000. The worse-than-expected jobs number caused the unemployment rate to increase to 9.8% from 9.7%, but that was expected. Are economists God? Sometime I wonder why their expectations are used as the benchmark. What if thier formulas for calculation are wrong?
We were talking about the stock market and a question was asked if there's going to be a W recovery. I really don't know. I am quite sure that there will be analysts who believe so and many others who oppose their opinions. Since we can only do a calculated guess, it is important to have the right strategies when investing in the stock market.
What is my stock trading and money management strategy?
I have mentioned in my last blog entry my trading strategy, so I will not repeat again. I will share alittle about my money management strategy here. Money management is the most important part of the overall stock trading strategies and all investors and traders should have theirs planned before trading the market.
My strategy supports my trading style, and I apply the following rules: 30-20-50. Looks like a football strategy, isn't it? Well, the 30-20-50 rule implies that I invest 30% of my money long term, maintain 20% liquidity for margin calls and 50% trading the market. Let's first talk about the 50% trading portion.
I am a position trader using CFD so it is a must to maintain liquidity in the event there is a margin call and I still believe I should hold on to the stock. There are concerns that CFD is a highly leveraged instrument for stock trading and leveraged trading is very risky. Well it can be risky, but if we manage leverage correctly, CFD is the most wonderful invention for traders like me. What do I mean?
Most CFD allows leverage up to 10 times the amount deposited, ie., if you deposit $10,000, you can have the buying power of $100,000. That is if a trader deposits $10,000 and buy into stocks worth the market value of $100,000. Unless the trader has excess cash reserves for margin calls, he will be better off if he placed stop losses at the same time he entered his purchases. As you can see, without CFD, the maximum value of shares the trader can buy is $10,000 and he need not worry about margin calls.
Now this is how I do it differently. If I want to own $10,000 market value of the shares I screened, I will use CFD to buy the $10,000 market value of the shares. I will not use the $10,000 to buy $100,000. My margin incurred will ne $1,000 and I will have the same exposure if the shares are purchased in the traditional exchange, but I have excess cash liquidity of $9,000. Since the shares I bought have to go through my Unique Stock Selection screening process, the chances of the shares falling more than 30% value is quite remote, and I will allow some swings periodically in the stock price till it achieve my pre-set target returns. The excess liquidity acts as the cushion for such swings and allows my stock trading strategy to work over the expected time.
That's why I can afford to drink last night. My shares didn't do well last night, but I am not worried. They are the right shares for me and I have my money management strategy in place. The only problem is my head is still pounding while writing this blog and it will not happen if I were to clued myself to the screen watching every single movement of the stock market. But I am sure most of us would prefer to enjoy Friday night drinks rather than watching the US markets. Well at least my strategies allow me to do so.
See you soon next Monday.
Francies Cheng
BBus MAppliedFinance
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