This article was originally included in Daryl Guppy’s Lessons in Applied Technical Analysis, voted for the res1 bulletin for Australian trade by Shares magazine and the №4 worldwide in US Stocks & Commodities magazine, and was reprinted here with Daryl’s permission.
In addition to developing solid technical analysis skills, a strong trading psychology combined with well-thought-out money and risk management are also vital key secrets to trading or investing in the market.
From real-life experiences and portfolio management lessons learned in a very difficult way, John Atkinson initially designed his series of three money and risk management spreadsheets to help his own trading. With the help of programmers Stephen Parsons and Peter Tamset, he recently added several user-friendly macros and now makes them available as easy-to-use and very affordable tools to help traders and investors plan and manage their portfolios.
They are designed to support the planning and development of profitable portfolio growth by introducing structured money control and risk management and as a means of keeping simple and accurate records.
Many investors and traders spend less time planning the risk of individual transactions and their overall portfolio to create wealth than when planning grocery shopping. Many do not plan at all, accurately track or review their progress.
Some believe that spreading or “diversifying” their portfolio into several large positions in “safe” blue chips is their way of dealing with money and risk management. They do not realize that overloading too many positions or too many positions can put their portfolio at serious risk.
Without proper planning, one can end up with a portfolio, which is a disaster waiting to happen. We know. We were there and we didn’t want you to go through sleepless nights and pull out the fear, the financial and emotional losses that we and a few traders we know have experienced as a result.
The main reason we lost our home in Sydney in 2000 and beyond was because we didn’t develop or stick to the right risk and money management rules – so our series of three portfolio tools was created by our personal very difficult experience of tapping into a very real financial cost of literally hundreds of thousands of dollars and with huge emotional costs.
Subsequently, we went looking for the information we would have liked to have sought or been advised before. These tools are based on various principles and strategies of “best practices in the world” taught by this newsletter, books by Daryl Guppy and other authors of traders such as Alan Hull, Louise Bedford, Dr. Alexander Elder and Dr. Van Tarp.
They consist of:
o Atkinson Portfolio Planner © – for advance planning of stock selection and overall risk for the sector and portfolio
o Atkinson Trade Optimizer © – Which stocks to buy when you have several to choose from and the funds available are only for one?
o Atkinson Portfolio Manager © – stop losses, targets, individual criteria for stocks and combined portfolios, expected duration of closed trades and much more
In the coming weeks, we will discuss each of these tools in detail.
We start this week with Atkinson Portfolio Planner ©.
This tool is designed to help you plan your portfolio properly so that you can sleep through the night knowing that you have a balanced portfolio and are not overly exposed in any trading, grouping hesitation or sector.
Also, that you have planned the correct number and size of open positions to make sure that your total portfolio risk does not exceed the criteria you specify.
This easy-to-use tool allows you to check the planned distribution of:
A combination of stocks with high, medium and low volatility
Combination of shares between sectors
Individual risk for each position as a% of your portfolio
Maximum% of your portfolio in any position
Total risk of your combined portfolio
Once you enter your requirements, Atkinson Portfolio Planner © will calculate the above key factors and even signal red warnings if any of your planned or open positions exceed your personal risk profile.
This allows the user to ensure that at the planning stages, your hard-earned capital will be allocated properly to match the risk levels selected by your own trading plan.
It is the user’s responsibility to research and select the criteria to be applied to his / her trading plan and as a key contribution to the portfolio planner © e.g. Instability and distribution by sectors, levels of loss suspension and% risk factors; and the final choice of which shares to buy and the applicable amounts of the position.
Putting all or most of your available funds in one stock or sector; exposing a large% of the portfolio to a single position or too many open positions with an unacceptable total% of the portfolio at risk are recipes for a potential disaster.
The experience of other traders shows that it is also prudent to diversify their capital in a chosen ratio between a set of high, medium and low levels of volatility in order to maximize the annual growth of their portfolio.
Experienced traders and investors have different rules for managing money and risk.
The following are some typical examples from the literature:
1. In his books and this bulletin, Daryl Gupi chooses 1/7 (14.3%) with high volatility (eg “Speculative”); 2/7 (28.6%) at medium volatility (eg “medium caps”) and 4/7 (57.1%) at low volatility (eg “blue chips”). Others may choose a maximum of 10% at high volatility. The final choice is the responsibility of the user
2. For small wallets, in her book Share Trading #, Daryl Guppy gives an example of building from $ 6k to $ 21k, starting with $ 2k (ie 1/3) with high volatility and $ 4k. 2 / 3rd) for stocks with low volatility; then divide this back by 1/7; 2/7 and 4/7 when the portfolio grew to $ 14k.
3. Maximum position size as% of the total portfolio: usually 20-25% absolute max; some are reduced to 15% or less for large portfolios or speculative stocks.
4. Maximum equity risk: No more than 2% of the portfolio to be exposed to risk in any transaction – some choose to reduce this 1% or 0.5% for larger portfolios or for more – very unstable positions.
5. In my book, 10 Ways to Not Lose Your Home in the Stock Market (2005), I wrote, “What we also failed to realize was that instead of spreading our risk, we increased our risk. For example, using a stop loss of 2% portfolio risk, let’s say a trader has ten positions. This means that if the market takes a sudden dive and all the stops are triggered, they risk losing 20% of their total portfolio value. Expand this to twenty positions, then 20 x 2% = 40% of their portfolio is at risk. It can happen – it has happened. If you freeze or have margin loans, the destruction can be far worse ….
Dr. Elder refers to the 2% risk rule as protection against shark attack and extends the concept further to a 6% rule to protect against piranha attack, ie. to close the entire portfolio if it falls by 6% in the last month.
Accepting this to its logical extension, Dr. Elder describes how, using this strategy, it also limits traders to three positions (2% risk) to start until some of them rise to a profit before opening additional ones. positions. “
(Readers may wish to refer to my module of the home money and risk management training course, which is based on and includes Daryl Guppy’s books on share trading and better trading and includes my portfolio tools – available at Also refer to books by Louise Bedford (eg Trade Secrets) and Dr. Alexander the Elder (eg Come to My Trade Room) for further explanations.)
In the following article, I discuss how we use the Atkinson Portfolio Planner to ensure that the following criteria for planned risk and money management are met:
1. The maximum total value spent in each grouping of variability
2. The maximum total value spent in each sector
3. The maximum size of the position as% of the total portfolio
4. Capital risk for each position
5. The combined total portfolio risk exposure