Setting trades up in a low stress way and the protective power of scaled investing.
Summerland Alerts will arrive by Email some time after the close of the stock market. They are a general alert. To view specific alert details, login to the member portal at summerlandassociates.com.
Upon receipt of the alert, evaluate its suitability for your investing strategy. Please bear in mind that Summerland Associates alerts are for informational purposes only and are not specific investment recommendations. Always consult a qualified financial adviser before making any investment decisions. (We highly recommend utilizing advisers that are not motivated by commissions.)
Assuming you are ready to act on the alert, simply set the trade up with your broker so that it will execute the following trading day. With most online brokerages, setting the order should only take a couple of minutes. It really is just that easy.
As you configure your trades, we recommend a cash management strategy that scales into the alerts. Have you ever watched CNBC? If so, you’ll eventually hear a Wall Street market maker use the phrase, “We’re keeping some powder dry.”
What they are saying is that they aren’t putting all their money to work. They are holding some of their cash for future better entry opportunities.
While less experienced investors may be tempted to put all of their money to work on one alert, the reality is not all alerts are profitable. Good, professional risk management dictates that we reserve capital for better opportunities.
If the first trade makes a profit, that’s great news. But if the price of an investment works against the trade, more opportunities will arise for a better time to put capital to work.
In the following scenario, the investor works from an alert given on 3/8/11 and invests all capital in SPXL, resulting in a -4.62% loss.
This is why scaling into an investment is such a fantastic method for risk management. Here’s how it works:
1st alert = invest 10%
2nd alert = invest 20%
3rd alert = invest 30%
4th alert = invest 40%.
Because Summerland Alerts tracks 3 primary ETFs, utilize the scaling in separately for each ETF alert until your portfolio is fully invested. This may mean that at certain times you are only 10% invested, and that’s OK. Other times, you might be 20% invested in each ETF for a total of 60%.
Looking again at the 3/8/11 alert for SPXL we find a series of additional alerts. (See the next chart.)
3/08/11 @ $27.24, 10% of the portfolio value.
3/11/11 @ $26.14, 20% of the portfolio value.
3/16/11 @ $24.48, 30% of the portfolio value.
3/17/11 @ $24.59, 40% of the portfolio value.
At its lowest point during this trade SPXL hit $23.26. By scaling into the position, the potential loss was limited.
More importantly, on 3/23/11 the trade was closed @ $26.01 for a 3.65%+ profit after all trade costs! The differential between the original potential -4.62% loss and the 3.65% achieved profit is substantial. That’s why scaling into an investment is so important.
In addition, not all tracked ETFs receive signals at the same time. By scaling into each, one reserves capital in case additional alerts are triggered for these ETFs later in the cycle.
Finally, if you are a less aggressive investor or have significant resources, you can separate your portfolio into 3 equal parts representing the three target econcomic cycles and ETFs that the alerts track.
Then you can invest into each using the scaling in method of 10%, 20%, 30%, 40%. In effect, as a percentage of the total portfolio the scaling pattern looks more like 3%, 7%, 10%, and 13%. In other words, this will limit your investment size and create slower growth.
But for someone not comfortable working at full throttle, this is another way to put a cap on risk and using a 3x leveraged ETF, one would still do exceptionally well, achieving an estimated 98.2% return over roughly 2.5 years.
Coming Up Next
Back | Course 11: A review: trading according to risk appetite. Risk tolerance and the unshakable influence on achieving long-term, above average performance.
