HFI Financial

financial planner planners Canadian planning advisor

We are a Canadian Financial services organization specializing in advanced tax sheltering, wealth accumulation planning, business succession, and retirement planning. We have also been very successful in reducing costs of employee programs and providing more tax effective compensation.

health, dental, rrsp, rrif, tax shelter, mutual funds, shared ownership, split dollar, segregated funds, bonds, life insurance, employee benefits, planners, financial, planner, pension plans, offshore, trusts, living buyout, universal life, IPP, rrsp maximums, disability insurance, RCA, levered, financial planning, estate planning, buy sell agreements, group insurance, group RRSP, accident and sickness insurance, Canadians Can Now Purchase an Affordable US Health Care Plan

We are a Canadian Financial services organization specializing in advanced tax sheltering, wealth accumulation planning, business succession, and retirement planning.

Financial, RRSP, Mutual Fund, Estate Planning, IPP, RRIF, Employee Benefits, Life Insurance, Universal Life, Tax Shelter, Living Buyout, Financial Planning, Retirement Planning, Shared Ownership, Pension, Trusts, Offshore, Shareholder Agreements, Accident and Sickness Insurance, Group Insurance, Canadians Can Now Purchase an Affordable US Health Care Plan

In trading stocks,  it’s important to know when to  hold – and when to fold.

Most people don’t want to dump a plunging stock.  But being able to do so is one of the 10 top money management rules an investor must master to be successful, says Keith L. Hatton, CFP,CLU,ChFC., TEP

Managing your money and managing your risk are two of the most important skills you can master. If you fail to protect your capital, you'll quickly be out of the trading game. If you fail to manage your risk, you'll wind up a loser no matter how high your percentage of winning trades may be. To reduce the likelihood either will happen, I've drawn up 10 top rules for money management. These rules fall into three broad categories: efficient trading, efficient ordering and minimization of trading costs. Let's take a look at each one. 

1. Cut your losses 

Of all the advice in all the books ever written about the stock market, this rule has to be the one most frequently mentioned. Not only is it crucial to long term success, but it runs counter to the basic psychology of most traders.

We are, after all, human - all too human. so instead of cutting our losses, most of us ride our small losses down until they become even bigger losses. Every time you enter a trade you hope it will be profitable, but you also fear a loss. Unfortunately, when it comes to cutting losses, hope usually overpowers fear exactly the opposite of the way things should be. Moreover, it's not just the money you lose that hurts you when you ride a loser down; it's also the fact that the money sitting in that loser is unavailable for a new trade - and a potential big winner.

At any point in time when you're holding a stock, you shouldn't ask, "Will this stock rebound and eliminate my loss?" Rather, you should ask yourself if there's a better stock or sector that you could buy that will move up faster and stronger than any rebound from your losing stock. Because the answer to this is most always yes, you must realize that at any time, you can always free yourself from that loser, incurring only a small commission in the process.  

2. Set good stop losses 

With this rule, we turn to the mechanics of cutting losses and the practice of efficient trading. There are three steps to setting stop losses: determining the amount you're willing to lose, setting a physical or mental -exit stop loss and taking the loss if the stop is violated. Although day traders might accept nothing higher than one-sixteenth of a per cent, position traders might be able to stand as much as eight or 10 per cent.  

The crucial point, however, is that you must not only quantify your maximum acceptable loss, but must do so before you make your trade. Having done this, you must then translate the loss into a specific exit point or stop loss, be it physical or mental. A "physical" stop loss is one that you program into your trading software.

 When you bought Buy.com at $20, you might have decided you would accept no more than an eight per cent loss. As a result, you could have entered a sell stop which basically directs your online - broker to sell Buy.com at the market price if and when it falls to $18.40. On the other hand, you could have simply set a "mental" stop a contract with yourself to sell Buycom if and when it actually hits the sell line. The "physical" frees you from having to stay close to your computer in order to exit the trade. So, if you're at lunch or at work and Buycom hits $18.40-bang, you're out. Of course, with a "physical" stop loss, you may unwittingly get "stopped out" of what otherwise might be a profitable trade. 

Indeed, there are few things more unsettling than being stopped out of a trade, only to see your stock immediately rebound to the new highs your own analysis had foresaw. 

3. Let your profits run 

Just as most traders stay too long in losing trades, most traders also want to choke off their profits by exiting trades too early. In both cases, it's the same perverse human psychology at work. When you've made a good trade and it starts to move in your favor, it should be time to hope the stock will go higher. Instead, many traders start worrying the stock will turn back on them and that they’ll lose some or all of the profit they're making. So, out of fear, they sell - usually far too soon. Consequently, what should be profit-making turns into premature profit-taking as fear triumphs over hope.

This is bad money management - primarily, because you're not giving your capital the best odds  -on opportunity to grow. If you always cut your losses quickly, but still let your winners run, you can be wrong much more than half of the time, yet still make lots of money. To see this, suppose you make 100 trades in a year, but only 40 per cent of them are winners. You'll still make good money if your average loss is 10 per cent, but your average gain is 20 per cent. This is why the combination of cutting your losses and riding your winners is such a potent weapon. 

4. Winners, not losers 

I can't think of any faster way to the funny farm than watching a stock you've bought first go up 10 points, only to drop 12 points and leave you with a loss. It just makes you sick to your stomach because you know that it's such a waste. In almost all cases, all you would have had to do to prevent your winner from turning into a loser is to carefully turn your original stop loss into a trailing stop. Suppose, for example, you buy 500 shares of Dell at $50, only to see it go up the next day to $52. If you set your initial stop loss at $45 and 718, you can move it up to a trailing stop of $47 and 7/8. Then, the next day when the stock goes to $56, you can move this trailing stop up further to, say, $53 and 7/8. At this point, your big winner will never become a loser. At the same time, you're calming down your fear of surrendering your gains while allowing your hope of a large gain to bloom. 

5. Averaging down 

Averaging down a loss means buying more shares when a stock goes down in order to lower your break-even price on the stock. But doing so is one of the biggest sucker plays in the market. Basically, when you do this, you're saying, "Hmm. I made what I thought was a good trade, but now I see that it's moving in the wrong direction. So rather than use my capital to find a better trade, I think I'll pour some more of my money down the same rat hole in the hope that the stock will rebound."

6. Don't churn stocks 

In the old days before online trading, unscrupulous stockbrokers churned clients' portfolios just to generate commissions. The irony today is that many online investors are now doing this to themselves. Often, they do this out of boredom, greed, addition to trading or, in the case of new traders, plain inexperience. Whichever shoe might fit you in this regard, you must conquer any urge to overtrade. 

7. Use market orders

To limit-order or to market-order? That's often the question that traders face. And it's a question that can often be answered by asking if the market is trending up or down, or trading in a range.Whenever your economic indicators lead you to the conclusion that the market, a sector or a stock is trending up or down, use market orders. For example, suppose you want to go long in Micron Technology, a semiconductor stock. If the market or the semiconductor sector is trending upwards, you may never get in if you simply keep offering the bid. And you may be tempted to chase the stock upwards as you keep missing the bid. In this case, you should use a market order. Similarly, if the trend is down and it looks like the retail sector is tanking, and you have the misfortune to be long in Wal-Mart but want to get out, don't mess around with the ask. Just do a market order, take your loss, and be gone. 

8. Use limit orders

Whereas market orders typically make sense in a trending market, limit orders will generally make sense when the market or a sector is in a trading range and moving sideways.In such a market, you can afford to be patient. If you want to go long, you can sit on the bid. If you want to get out or go short, you can sit on the ask. By so doing, you'll capture the spread. Remember: a teenie saved is a teenie earned.  

9. Market orders, IPOs 

Perhaps the most important rule for efficient ordering is this: never, ever place a market order before the market's opening bell or for a new IPO. The danger of placing a market order in either of these situations is that a stock will "gap and crap." That is, the stock may shoot up at the opening bell under heavy pressure from accumulated market orders. But, after that pressure is released, it may fall back one, two or three points or, as with many IPOs, as many as 30, 40 or even 50 points. 

10. The right broker 

Most brokers are primarily concerned with commissions and, only secondarily, with making money for clients. That's why in most cases you will be much better off trading electronically. But choosing the right electronic broker is a far more subtle task than simply getting the lowest commission. Speed of order execution, as well as any resultant slippage between your bid price and the eventual order fill price, are equally important. You must also carefully read the fine print on suck matters as constraints on share size and different prices for different kinds of orders.

---

Information Request Form click here

We are a Canadian Financial services organization specializing in advanced tax sheltering, wealth accumulation planning, business succession, and retirement planning. We have also been very successful in reducing costs of employee programs and providing more tax effective compensation.

health, dental, rrsp, rrif, tax shelter, mutual funds, shared ownership, split dollar, segregated funds, bonds, life insurance, employee benefits, planners, financial, planner, pension plans, offshore, trusts, living buyout, universal life, IPP, rrsp maximums, disability insurance, RCA, levered, financial planning, estate planning, buy sell agreements, group insurance, group RRSP, accident and sickness insurance, Canadians Can Now Purchase an Affordable US Health Care Plan

We are a Canadian Financial services organization specializing in advanced tax sheltering, wealth accumulation planning, business succession, and retirement planning.

Financial, RRSP, Mutual Fund, Estate Planning, IPP, RRIF, Employee Benefits, Life Insurance, Universal Life, Tax Shelter, Living Buyout, Financial Planning, Retirement Planning, Shared Ownership, Pension, Trusts, Offshore, Shareholder Agreements, Accident and Sickness Insurance, Group Insurance, Canadians Can Now Purchase an Affordable US Health Care Plan

Call us toll-free at (866) 444-2745 with questions or comments about this web site.

Copyright © 1996-2008 Hatton Financial Inc.

Last modified: December 14, 2008