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Rick,
That's a good question since I do believe in limited
diversification and money management. In fact, setting the stop at
that level violates two of my general guidelines in that I like the
reward/risk to be better then 3 to 1 and I like the initial position
risk to be less then 8%. Since my positions are normally 10 to 20% of
my portfolio, that gives me a 0.8 to 1.6% portfolio risk per position,
but these are just general guidelines. I do have a firm rule of never
risking more then 2% of my portfolio on any single position and I'm
well within that rule.
The answer, which probably isn't a very good one, is that I just
won't set percentage stops. I've read all the books on
portfolio/money management and setting stops, but pure percentage
stops just never made good sense to me. I firmly believe that stops
should be set based on some valid technical barrier or condition such
as a congestion area or outside the boundary of a trend channel. In
this case, to me, there just wasn't a valid place to set a stop any
closer then 96 3/4. I will move it up under the intermediate term
channel as soon as I can and will switch to a Short Term Up Trend
Channel (STUTC) just as soon as I have enough data for a STUTC that
looks valid to me. In the meantime, I'll just accept the 13.5%
position risk. I did compensate somewhat by setting my position size
to 10% of my portfolio which limits my portfolio risk to
((111.875-96.75/111.875)*.1 or 1.35%.
Hope that makes sense <G>.
Jim
-----Original Message-----
From: Rick Mortellra <rmjapan@xxxxxxxxxxxxxxx>
To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
Date: Sunday, August 09, 1998 9:05 AM
Subject: Re: Weekly Pick
>Hi Jim,
>
>I got into AOL on Wed. 8/5 at the same 111 level. Fortunately, I
didn't get
>to experience the heart attack of watching it plunge to 97.5 shortly
>thereafter since I was sound asleep. Living 13 time zones away has
its
>trading advantages :-)
>
>FYI, I use Maximum Adverse Excursion to determine my Stop Loss
levels.
>However, its suggested stop of 103 put it well outside my money
management
>guidelines. Luckily implied option volatility was at a peak that day
and I
>was able to take some nice premium selling covered calls that allowed
me to
>still take the trade and juice my upside too.
>
>I guess my question is, how do you work a nearly a 15% drop from 111
to your
>stop of 96.75 under your money management rules?
>
>very curious,
>Rick
>
>
>-----Original Message-----
>From: Jim Greening <JimGinVA@xxxxxxxxxxxxx>
>To: Metastock <metastock@xxxxxxxxxxxxx>
>Date: Sunday, August 09, 1998 3:57 AM
>Subject: Weekly Pick
>
>
>
>> AOL at 111.875 is in a long and intermediate up trend and just
>>broke out of a Short Term Down Trend Channel (STDTC). The top of
the
>>ITUTC is at 150 and the bottom is at 97. It hit an all time high of
>>140 1/2 on 7/21/98 and then pulled back to the bottom of the ITUTC
>>during the day Wednesday. From their it started back up and broke
out
>>of it's STDTC on good volume Friday. The indicators support my
theory
>>that a short term trend change is in progress. This is a pure
>>momentum play on an internet stock so, as expected, the Price/Sales
is
>>extremely high at 10.94. The rest of the fundamentals look good
with
>>Debt/Equity of 0.84, 27% insider ownership, actual earnings this
year,
>>and five year average annual growth of over 100% and this years
>>revenue growth still over 50%. I'll set the target just under the
top
>>of the ITUTC at 149. I'll set the initial stop just under the
bottom
>>of the ITUTC at 96 3/4. Once there is enough data for a good Short
>>Term Up trend Channel (STUTC), I'll move the stop up to under it.
>
>
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