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Stock Portfolio Management

Stock portfolio management is where we finally put all our analysis to work. Here we apply our trading discipline to protect our valuable capital and capture profits. Managing you stock portfolio is the most important and the most difficult aspect of investing. This is where most investors and traders fail. They let their emotions take control and make poor decisions; decisions they know they shouldn't make but they do so anyway. The result - they loose money.

This is the fifth part of a five part series on how to beat the stock market the Trading Online Markets way.

  1. The Business Cycle Phases
  2. Stock Market Trend Analysis
  3. Stock Selection Guide
  4. Disciplined Investing
  5. Stock Portfolio Management

The discipline of stock portfolio management revolves around a formal process to overcome the emotional side of investing. It builds on the four prior steps using the insight you gained.

  1. Execute your trade as you designed it in the Timing the Entry step.
  2. The alerts set earlier are an indication that the price is nearing the entry price zone. Then monitor the price action using available charts such as the daily, and 60 minute chart. When all the trade criteria are aligned, enter your limit order. Once you receive confirmation that your order has been executed, it is time to enter your stop order. If you do not like exposing your stop order to the market makers, then at least enter an alert to warn you that you need to exit the stock as it hits your stop price.

  3. Monitor the chart to track the progress of your investing plan for each stock in your portfolio.
  4. Keep track of the performance of the stock and any news that might impact the planned entry point. Using the alerts you set earlier, monitor progress of the price of the companies on your watch list.

  5. Periodically review and update your risks and adjust your exit target and stop accordingly (never lower your stop).
  6. Periodically, review your positions to assess if the trade is going as expected. Also, look for any new news or events that might impact your original analysis and change your strategy. Most financial web sites, like Yahoo! Finance and MarketWatch have email alerts on news events for individual stocks. It is a good idea to take advantage of these services for each of your positions.

    Adjust the exit price and stops if deemed necessary. Do not lower your stop. Premium members will receive an email alert on any changes in the exit price or stop adjustments.

  7. Sell part of position based on market trend (1/2 on flat and up markets, 3/4 or all in down markets).

    Good capital management suggests that you capture some of your profits and let the remaining run. This helps to capture some initial profit from the trade. Then adjust your stop up to at least the entry price to avoid a losing trade. Selling part of your initial position frees up some of your capital to take positions in new opportunities.

    During strong up trends sell 1/2 of your position at or near a key intermediate level that usually represents resistance. If the market is either flat or in a down trend sell 3/4 of your position and tighten up stops accordingly. It might also be prudent to sell the entire position. Ideally, use areas of resistance for longs and areas of support for shorts to determine where these intermediate areas lie.

  8. Close out position and move on to next opportunity.

    Sell your remaining position at either your updated target or your updated trailing stop. you don't want to be to greedy, hoping the price will keep going up. Taking profits is a good thing. There are always new opportunities available.

  9. Analyze your trade to learn what went right and what went wrong.

    Every trade offers an opportunity to learn. Since you have documented each trade in detail, you can go back and review what went right and what went wrong. By analyzing each trade you can learn from any mistakes you made as well as what went right. You need to separate what was "luck" from skill. Look for patterns of behavior that are harmful to successful trading and then eliminate them. Now is the time to be critical of each decision. Then use the analysis to adjust your trading and investing skills. Use this analysis as a learning tool to improve your investing and trading.

Let's return to the T.J. and CRZO the stock he identified that might be a good buy. On December 14, T. J. entered an order at 9.5 to establish an initial position. With the good fundamentals for the company he believed this was a good place to open his initial entry. He chose to make this entry after the price rebounded from 9, so a move up is consistent with both the ascending triangle and horizontal channel chart formations.

On 12/20/04 CRZO broke above 10.87 with volume slightly above average. T.J.'s follows Trading Online Markets discipline that calls for him to enter breakout trades when there is strong continuous volume and he felt he should wait to see what happens in the next several days. T.J. likes to swing trade, often holding a stock for several months before selling.

His sister C.J., a day trader, entered a limit order at 10.91 (4 cents above breakout to help insure she gets the shares) when CRZO trades through 10.87 with above average volume. C.J. sold 1/2 of her shares later that day for $.30 profit per share (2.7%) before commissions. She also entered a trailing stop loss at $.30 below the bid price. This way she was assured of at least breaking even on her remaining shares. On 12/21/04, C.J.'s remaining shares were sold at 11.27, leaving her a $.36 profit on her remaining shares (3.3%) before commissions. A nice quick trade, but is there more that can be made?

CRZO moved sideways for the next several weeks eventually falling to 10. On 1/11/05 volume jumped dramatically and continued the next day. With the strength of this move driven by volume, T.J. decided to add to his initial position by entering his limit order at 10.91 on the second day. He chose 10.91 since it was $.04 above the earlier resistance level. Before entering his trade, T.J. decided to set and maintain his trailing stop at $.20 below the 200 Day Exponential Moving Average (EMA) for all of his positions. Initially this was 9.10. His first target is 13.75 - 14, the high reached by CRZO in September 2000. T.J. plans to move this stop up with the upward movement of the 200 daily moving average. This will give the price sufficient room to move, yet protect his position for a major reversal.

On 2/7/05 CRZO penetrated 14 so T.J. sold 1/2 of his position. As a result he realized a profit of $4.5 on the original purchase at 9.5, a very nice 47.4% gain 3 months. For the other half of his position T.J. moved up his stop along with the 200 daily moving average to just under 10.

CRZO continued to move up until in February 2006, when the price hit the 200 daily moving average at 23. T.J. closed out his remaining position at 23 realizing a profit of $12.09 or 110.8% profit in 15 months. A very nice gain.

By following his plan T.J. was able to realize a substantial profit with very little risk. The homework he performed paid off handsomely. He followed his discipline by understanding the business cycle and the trends in the market. Then T.J. focused his stock selection effort on good companies that were trading at depressed prices, yet offered excellent growth potential. This growth at reasonable prices approach produced several excellent opportunities. CRZO was one of them. He then employed his timing criteria to find the ideal entry prices as well as his stop loss to protect his capital. And finally T.J. managed his position by finding places to place his stops based on the chart and indicators. He also was able to identify the best places to sell part of his position based on prior highs.

While not every investment performs like CRZO, if you follow a similar disciplined process you have a much better chance of achieving superior results.