This article originally appeared on Daryl Guppy’s ‘Applied Technical Analysis Tutorials’, was voted the #1 trading newsletter in Australia by Shares magazine and #4 in the world by US Stocks & Commodities magazine and is reproduced here with Daryl’s permission.
In addition to developing strong technical analysis skills, strong trading psychology along with well thought out money and risk management are also vital key secrets to success when trading or investing in the market.
Drawing on real-life experience and portfolio management lessons learned the hard way, John Atkinson originally designed his series of three money and risk management spreadsheets to help his own trading. With the help of programmers Stephen Parsons and Peter Tamsett, he recently added several easy-to-use macros and has now made them available as very affordable, easy-to-use tools to help traders and investors plan and manage their portfolios.
They are designed to assist in planning and developing profitable portfolio growth, implementing structured money and risk management control, and as a means of keeping simple and accurate records.
Many investors and traders spend less time planning the risk of individual trades and their overall wealth-building portfolio than planning their grocery purchases. Many don’t plan, accurately track, or review their progress at all.
Some think that spreading or ‘diversifying’ their portfolio across several large positions in ‘safe’ blue chip stocks is their way of approaching money and risk management. They don’t realize that overloading on too many positions or on too large a position can seriously put their portfolio at risk.
Without proper planning, one can end up with a portfolio that is a disaster waiting to happen. We know. We’ve been there and we don’t want you to go through the sleepless nights and heartbreaking fear, financial and emotional loss that we and some traders we know have experienced as a result.
One of the main reasons we lost our Sydney waterfront home in 2000 and more since then was for not developing or adhering to the correct risk and money management rules, which is why our series of three portfolio has been created from our own very difficult personal experience in a very real moment. financial cost of literally hundreds of thousands of dollars and enormous emotional cost.
We then search for information that we wish we had searched for or were told earlier. These tools are based on various “global best practice” principles and strategies taught in this newsletter, in books by Daryl Guppy, and by other trade authors such as Alan Hull, Louise Bedford, Dr. Alexander Elder, and Dr. Van Tharp.
Its about:
o Atkinson Portfolio Planner © – to plan your stock selection and overall sector and portfolio risk in advance
o Atkinson Trade Optimizer © – which stocks to buy when you have a few to choose from and funds are only available for one?
o Atkinson Portfolio Manager © – stop loss, targets, individual stock and combined portfolio stock curves, expectation of closed trades and much more
In the coming weeks we will discuss each of these tools in detail.
We start this week with the Atkinson Portfolio Planner©.
This tool is designed to help you plan your portfolio correctly so that you can sleep at night, knowing that you have a balanced portfolio and that you are not overexposed in any one trade, volatility group or sector.
In addition, you have planned the correct number and size of open positions to ensure that the total risk of your portfolio does not exceed the specified criteria.
This easy-to-use tool allows you to check your planned allocation of:
Mix of high, medium and low volatility stocks
Stock mix across sectors
Individual risk of each position as a % of your portfolio
Maximum % of your portfolio in any position
Total risk of your combined portfolio
Once you’ve entered your requirements, Atkinson Portfolio Planner © will calculate the essential factors above and even flag red alerts if any of your planned or open positions exceed your personal risk profile.
This allows the user to ensure in the planning stages that their hard-earned capital will be placed correctly to match the risk levels selected by their own Trading Plan.
It is the user’s responsibility to research and select the criteria that will be applied to their Trading Plan and as key input to the Portfolio Planner © p. eg, volatility and sector allocation, stop loss levels and % risk factors; and for the final selection of which stock(s) to buy and the applicable position size(s).
Put all or most of your available funds into one stock or sector; putting a large % of one’s portfolio at risk in any position or having too many open positions with an unacceptable total % of portfolio at risk are recipes for potential disaster.
The experience of other traders shows that it is also wise to diversify your capital in a proportion chosen from a range of high, medium and low volatility stocks to maximize the annual growth of your 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 newsletter, Daryl Guppy picks 1/7 (14.3%) on high volatility (ie ‘speculative’); 2/7 (28.6%) in medium volatility (eg ‘mid caps’) and 4/7 (57.1%) in low volatility (eg ‘blue chips’). Others may opt for a maximum of 10% on high volatility. The final choice is the responsibility of the user.
2. For small portfolios, in his book Share Trading #, Daryl Guppy provides an example of building $6k to $21k, starting with $2k (i.e. 1/3) on high volatility and $4k (i.e. 2/ 3) in low volatility stocks; then dividing this back to 1/7; 7/2 and 7/4 when the portfolio has grown to $14k.
3. Maximum position size as % of total portfolio: typically 20-25% absolute maximum; some are reduced to 15% or less for large portfolios or speculative stocks.
4. Maximum equity risk: no more than 2% of the portfolio that will be put at risk in any trade; some choose to lower this 1% or 0.5% for larger portfolios or more volatile positions.
5. In my book ’10 Ways to Not Lose Your Home in the Stock Market’ (published in 2005) I wrote “What we also didn’t realize was that instead of spreading our risk, we were magnifying it. For example, using a portfolio risk 2% stop loss, lets say a trader has ten positions, that means if the market suddenly dips and all the stops are triggered, you risk losing 20% of the total value of your portfolio. that at twenty positions, so 20 x 2% = 40% of your portfolio is at risk. It can happen, it did. If you freeze or have margin loans, the destruction can be much worse…
Elder refers to the 2% risk rule as protection against shark attack and expands the concept to a 6% rule to protect against piranha attack, i.e. to close the entire portfolio if it falls 6% in the last month.
Taking this to its logical extension, Dr. Elder describes how, when using this strategy, he also limits traders to three positions (at 2% risk) to start with, until some of them take profit, before opening additional positions. “.
(Readers can refer to my Home Study course module on Money & Risk Management, which is based on and includes Daryl Guppy’s Share Trading & Better Trading books and includes my portfolio tools, available on our site. Please also refer to Louise’s books Bedford ( (eg, Trading Secrets) and Dr. Alexander Elder (eg, Enter My Trading Room) for further explanation).
In the following article, I discuss how we use the Atkinson Portfolio Planner to ensure the following risk and money management planning criteria are met:
1. The maximum total value spent on each volatility pool
2. The maximum total value spent in any sector
3. The maximum position size as a % of the total portfolio
4. The equity risk of each position
5. The total risk exposure of the combined portfolio
