Now that the market is back in a confirmed uptrend, I have been receiving a lot of questions from clients and friends asking what the next “hot” stock is. While stock selection is indeed an integral part of any trading system, money management tactics are paramount. An uptrend simply means growth investors have the green light to purchase growth stocks with stellar fundamentals emerging from sound price structures. That does not mean that one should plunge right in, it simply means to take one probe or pilot position.

The savvy investor methodically moves into the market having answered several critical questions: What is my position size? What is my overall exposure? Where will my stops be placed? What is the nature of the volatility of the different stocks in which I plan to traffic? The answers to these questions are correlated.

The seasoned investor will have the answers to these questions BEFORE a trade ever takes place. They have already calculated the worst case scenario (namely, the amount of heat they are willing to take if every one of their positions were to get stopped out). Many choose to risk 1% of total assets under management on an individual trade, and no more than 3% overall. Stops should not be based on pain that the trader can take, but rather on where major support lies or if an important moving average is breached. Position size should be adjusted accordingly. Traders must be aware that the market has no favoritism; it will go where it is going to go. There is always the possibility of being wrong.

Prominent hedge fund manager Larry Hite sums up the experienced investor’s mindset best with this quote:  “There are two basic rules: 1) If you don’t bet, you can’t win and 2) If you lose all of your chips, you can’t bet.” Move into the market in a calculated manner with a well thought out plan, and stay engaged.  Remember: no one has ever made money in the market without doing their homework–and a lot of it.

Best Returns,

Andrew Rocco

The MarketSmith Team