Learn how top performing hedge fund managers and traders protect profits and avoid losses.
Online PR News – 16-March-2010 – – We don’t like one time wonders, but we do like consistent ones, especially when it comes to performance over a full 10 year market cycle.
British Virgin Islands based Laureate Trust has a 10 year return of over 31%, in 2008 they ended the year up 42% while the average fund was down more than 40%. This fund company believes to buy-and-hold is a sure way to underperform the market. “The buy-and-hold strategy worked well in the 1990s but after year 2000 you must be fine tuning and adjusting positions in your portfolio. This is an evolving market and to buy-and-hold is simply fiscally irresponsible,” says CEO Peter Tasca.
One of the rule based trading strategies used by top performing hedge fund managers and professional traders, is a profit-loss plan with specific buy and sell targets. By cutting your losses and taking profits after a decent advance, you’ll avoid damaging losses to your portfolio.
In 2007, Billionaire Kirk Kerkorian pulled money out of a money-losing investment he made in Ford Motor Co. But he did not use the same sell-discipline in his shares of MGM Mirage which in October of 2007 were valued at $14.9 Billion USD, those assets are now worth around $850 million USD.
The first rule is the most important: sell your stock as soon as it pulls back 8% from your purchase price. The larger your losses, the more you need to make back. For example; if you purchase a stock at $50.00 and it goes down to $25.00, now to make back your losses your stock needs to go up 100% for a breakeven. Keep in mind, if you buy a stock that runs up 10% and pulls back 8%, you don’t necessarily have to sell. The stop-loss rule applies only to your purchase price. The reason professionals use 8% as their stop-loss rule is because historically winning stocks never fall more than 8% from their proper buy points.
An easier approach is to plan on taking profits once stocks are up 20% to 25%. The way to gauge if your stocks will surge beyond the 20% to 25% profit target is based on the momentum and trend of the market. “If we have a stock that accelerates up 25% within three weeks of our buy point, we then put in trailing stops 5% below its 5-day moving average,” says Tasca. Historically, this price action typically occurs with stocks that run up 50%, 100% or more within 8 weeks, according to professional traders.
It is important to note, when employing a trading strategy make no exceptions to your discipline and you’ll avoid damaging losses.