I have been arguing (going back and forth) with a “so-called” investor on another forum and he questioned my trading methods and claimed I would lose 76% if I took 8 consecutive 8% losses. Knowing me, I had to breathe deeply, release the anger from a person who knows nothing about position sizing and teach him a simple math lesson. The following example is simplified to allow you to understand what is happening. In the real world, things are a bit more complicated with commissions, emotions, slippage and the like.

Enjoy the position sizing example. It shows you how you can lose 80% of the time (worse case scenario); yet still come out a slight winner.

If I start with $100,000 and lose 8 consecutive trades at 8% (only risking 3% of capital with 8% stop loss), this is what it looks like:
$100,000 portfolio
3% risk per trade
8% stop loss

1st Trade:
Risk will be $3000 = ($100,000*3%)
Amount to Trade at 8% stop: $37,500 = ($3000 / 8%)
An 8% stop loss will cost me $3000

2nd Trade:
Risk will be $2,910 = ($97,000*3%)
Amount to Trade at 8% stop: $36,375 = ($2,910 / 8%)
An 8% stop loss will cost me $2,910

3rd Trade:
Risk will be $2,822 = ($94,090*3%)
Amount to Trade at 8% stop: $35,283 = ($2,822 / 8%)
An 8% stop loss will cost me $2,822

4th Trade:
Risk will be $2,738 = ($91,267*3%)
Amount to Trade at 8% stop: $34,225 = ($2,738 / 8%)
An 8% stop loss will cost me $2,738

5th Trade:
Risk will be $2,655 = ($88,525*3%)
Amount to Trade at 8% stop: $33,198 = ($2,655 / 8%)
An 8% stop loss will cost me $2,655

6th Trade:
Risk will be $2,576 = ($85,873*3%)
Amount to Trade at 8% stop: $32,202 = ($2,576 / 8%)
An 8% stop loss will cost me $2,576

7th Trade:
Risk will be $2,498 = ($83,297*3%)
Amount to Trade at 8% stop: $31,236 = ($2,498 / 8%)
An 8% stop loss will cost me $2,498

8th Trade:
Risk will be $2,423 = ($80,798*3%)
Amount to Trade at 8% stop: $30,299 = ($2,423 / 8%)
An 8% stop loss will cost me $2,423

Total loss after 8 trades: $19,201
This loss totals 19% (minus commissions etc…)

TRADE #9:
Risk will be $2,351 = ($78,374*3%)
Amount to Trade at 8% stop: $29,390 = ($2,351 / 8%)
An 8% stop loss will cost me $2,351
**This trade ends with a 40% gain: $11,756 = ($29,390*40%)**

Original amount: $78,374 + $11,756 = $90,130

TRADE #10:
Risk will be $2,703 = ($90,130*3%)
Amount to Trade at 8% stop: $33,787 = ($2,703 / 8%)
An 8% stop loss will cost me $2,703
**This trade ends with a 30% gain: $10,136 = ($33,787*30%)**

Total portfolio worth: $100,266

WOW – a profit with 8 consecutive losing trades and 2 winning trades!
That is a 20% winning percentage but it gave me an end result of a slight profit!

This is how money management works!

Now just imagine have a winning percentage of 40% or greater and cutting some of those losses at less than 8%, your portfolio could easily gain 50% or more in one year with a 40% winning percentage based on simple position sizing!

This is how TRUE investors and traders take money out of Wall Street.
Piranha

Last August (2005), I posted a case study on Ctrip.com (CTRP), a Chinese holding company that consolidates hotel accommodations and airline tickets. I listed a chart with the obvious pivot point of $58.50 on the cup with handle pattern. The stock went on to breakout but then violated the sell point forcing me to close the position. I never moved back into the stock but I can tell you that it never broke below the long term moving average support and has since gone on to make more than 35% (from the original pivot point).

The original case study is listed below with an updated chart to show you what has happened since we targeted the stock last summer. Timing is a key component when attempting to make money in stocks but cutting losses short is even more important. If you followed rules with this stock, you could have bought the original pivot point, sold for a small loss and then reentered at the 200-d m.a. or the last breakout to the up-side for the most recent gains.

Often times you will buy a stock that looks solid for the long term but buy it at the wrong time. This doesn’t mean that your stock selection was wrong; it just means that you must follow rules to eventually realize a profit (even if you are forced to sell one or more times). CTRP turned out to be a winning stock but not the way I anticipated when I added it to the MSW weekly screens (MSW Index) last year.

These are the updated institutional numbers (study them and then look at the difference from last August – numbers located below):

Number of Institutions (latest reporting period):
Total: 165
Money Mangers: 73
Mutual Funds: 87
Other: 5

New Positions: 51
Positions Sold Out: 37

ALL INFO BELOW THIS POINT FROM 8/23/05
CASE STUDY – Cup with Handle Setup
CTRP – Ctrip.com Intl ADS

Leisure Services - Transportation

Ctrip.com International, Ltd., a holding company, consolidates hotel accommodations and airline tickets in China. The company aggregates information on hotels and flights and enables its customers to make hotel and flight bookings. It also offers packaged-tour products and other travel-related products and services. The company enables its customers to choose and reserve hotel rooms in cities throughout China and selected cities abroad; book and purchase airline tickets for domestic and international flights originating from China; and choose and reserve packaged tours that include transportation, accommodation, and sometimes guided tours as well. It offers its services to customers through a transaction and service platform consisting of centralized toll-free, customer service center, and bilingual Web sites. It offers its services primarily to business and leisure travelers in China, who do not travel in groups. Ctrip.com International was founded in 1999 and is based in Shanghai, China.

CTRP has been making numerous daily screens over the past several weeks and a few “short lists” on our weekly screens. This past week, CTRP was one of the new stocks that we are watching on the weekly screen. After reviewing the fundamental numbers further and studying the chart, I decided that this stock would be best suited for a case study due to the cup with handle pattern formation.

The company smashed earning expectations in the second quarter of this year but gave a soft outlook for the third quarter. According to analysts, the company is usually hesitant when giving future expectations. Some analysts point to rising competition within the Chinese online travel industry, giving us lower expectations going forward. In any event, we can only go by past earnings numbers and current technical analysis. See our chart analysis under the “Chart Legend” section of this case study located below the fundamental breakdown of the stock.

Sister Stocks:
Ambassadors Group Inc. - EPAX
Intrawest Corp. - IDR
Bluegreen Corporation - BXG
Steiner Leisure Ltd. - STNR

Key Ratings:
Overall Rating in IBD: B+
EPS Rating: 76
Relative Price: 86
Industry Group Rank: 113 (of 197)

3-Year EPS Rate: 113%
3-Year Sales Rate: 83%
ROE: 28%
PEG: 1.13

EPS Analysis:
2003: 0.06
2004: 1.02
2005: 1.48 (E) High estimate: 1.62
2006: 1.98 (E) High estimate: 2.39

Revenue: (in millions)
2003: 173.00
2004: 334.00

Net Income: (in millions)
2003: 53.8
2004: 133.00

Number of Institutions (last reporting period):
Total: 38
Money Mangers: 21
Mutual Funds: 16
Banks: 1
Insurance Co.: 0

New Positions: 16
Positions Sold Out: 9

Chart Legend:
1. The stock started with an IPO in late 2003 with very volatile movement but then quickly started into a down-trend until bottoming out in May of 2004.
2. After a brief up-trend, the stock formed its first cup with handle base last summer and then exploded into a strong up-trend that took the stock from $34 to $55 in less than two months.
3. After the peak near $55, the stock formed our current pattern that has lasted for nine months with a nice shaped cup base and handle formation.
4. The only problem that I can see with the cup shaped pattern is the lack of strong volume on the right side of the base.
5. The handle has been forming for seven weeks with decreasing volume, an excellent sign of shaking out weak holders.
6. The pivot point was set $0.10 higher than the highest intraday high in the handle at $58.50.
7. A move above $58.50 on volume with at least 242k shares traded would qualify as a strong buy.

The general market is not healthy but some stocks tend to defy the general market trend and follow through for a breakout. The ideal situation would have the stock breaking out while the market is starting to breakout, confirming that the stock may be a market leader in the next rally.

If the stock breaks out and you buy, make sure your mental sell stop is already placed in your head or on paper. If the stock fails after the breakout and your stop area is triggered, DO NOT hesitate later date if the timing is wrong. The ‘M’ in CANSLIM is not healthy so the stock can give a false breakout.

Piranha

CASE STUDY – Can HANS do it Again?
HANS – Hansen Natural Corp.

Beverages – Soft Drinks

Company Profile:
Markets, sells and distributes beverage category natural sodas, fruit juices, energy drinks, lemonades and orangeades

Hansen Natural Corporation. The Group’s principal activity is to market, sell and distribute beverage category drinks. These include natural sodas, fruit juices, energy drinks, sparkling lemonades and orangeades, non-carbonated ready-to-drink iced teas, lemonades, juice cocktails and energy sports drinks, children’s multi-vitamin juice drinks and nutrition bars and cereals. The Group also markets and distributes energy drinks under the Monster(TM) brand name. In addition, it markets nutrition bars and cereals under the Hansen’s(R) brand name. Its fruit juices for toddlers and malt-based drinks are marketed under the Junior Juice(R) and the Hard e(TM) brand names. The Group’s operations are conducted through wholly owned subsidiaries Hansen Beverage Company (’HBC’) and Hard Energy Beverage Company (’HEB’). The customers of the Group include, Costco, Trader Joe’s, Sam’s Club, Vons, Ralph’s, Wal-Mart, Safeway and Albertson’s. - Profile provided by Ameritrade.

Hansen first entered my life a as $60-$100 candidate back in May 2005 before the most recent split adjustment. Using the non-split adjusted price of $66.56, HANS quickly moved through the infamous range within two months. After consolidating for another two months, I sold my shares and also removed it from the MSW Index. The consolidation period went on to form for a total of four months as the stock split 2-for-1.

After the stock split, HANS broke out once again towards the $60 range and I jumped back in and started coverage on the MSW index for the second time in one year. This time, the stock bolted from $60 to $80 in six weeks and then traded sideways for five weeks before breaking out once again and completing another $60-$100 range. A quick reversal from $100 forced me to take profits and eventually remove it from the MSW Index in January 2006. I also sold these shares due to the weakening market as told by the NH-NL ratio and the individual leaders (HANS being one of them).

Recently, the stock has been forming yet another base (8 weeks) while holding the long term moving averages. HANS broke out to a new high last week and we screened it on our daily charts and have it sitting on our weekly honorable mention list (looking for a new entry area before adding it back to the MSW Index). I have not bought back into HANS for a third time but I am looking for the opportunity. Without using the split adjusted price, I have bought shares at $66.56 and $115.26 (now I am looking to place a new position above $200 per share).

Stocks that make new highs typically continue to make additional new highs unless the trend changes! The trend hasn’t changed for this stock YET! Let’s take a look at the financials that have fueled this all-star stock over the past two years. Remember, I bought at $66 after the run-up from $15 to $60.

Sister Stocks:
Glacier Water Services – GWSV
Jones Soda – JSDA
Leading Brands – LBIX
National Beverage - FIZ

Key Ratings:
Overall Rating in IBD: A+
EPS Rating: 99
Relative Price: 99
Industry Group Rank: 41 (of 197)

3-Year EPS Rate: 178%
3-Year Sales Rate: 58%
ROE: 68%
PEG: 1.53

EPS Analysis (yearly):
2001: 0.14
2002: 0.14
2003: 0.28
2004: 0.87
2005: 2.59
2006: 3.64 (E)
2007: 4.49 (E)

EPS Analysis (quarterly):
Q1 (2004): 0.09
Q2 (2004): 0.22
Q3 (2004): 0.25
Q4 (2004): 0.31

Q1 (2005): 0.37
Q2 (2005): 0.31
Q3 (2005): 0.83
Q4 (2005): 0.75

Revenue: (in millions)
2001: 92.28
2002: 92.05
2003: 110.3
2004: 180.3
2005: 348.9

Net Income: (in millions)
2002: 3.03
2003: 5.93
2004: 20.4

Pretax Income (in millions):
2002: 5.07
2003: 9.76
2004: 33.9

Total Assets (in millions):
2002: 40.5
2003: 48.0
2004: 82.0

Key Stats in 2005:
Annual 2005 EPS: $2.59 vs. $0.87
Q1 EPS: $0.73 vs. $0.19 (not split adjusted)
Q2 EPS: $0.63 vs. $0.22 (not split adjusted)
Q3 EPS: $0.83 vs. $0.24
Q4 EPS: $0.75 vs. $0.31

Number of Institutions (last reporting period):
% Shares held by Institutions: 49%
Total Institutions: 383
Money Market: 175
Mutual Funds: 200
Other: 8
New Positions Bought: 113
Existing Positions Sold: 37
Top Mutual Fund Holder: Fidelity Low-priced Stock Fund (1.5 mil shares)

Piranha

Based from the blog earlier in the week, I have updated the NH-NL ratio chart using the latest figures from the weekly averages. As you can see, the NH-NL ratio has been playing see-saw with the 80% positive/neutral line. With the NH-NL ratio staying below 500 new highs per day, we should not expect the line to travel in positive territory.

If you are skeptical about the line plotting above the 80% positive level, let me remind you of early 2004 when the NH-NL ratio was still extremely powerful (the end of the 2003 bull run):

January 2004:
1/06/04: 856-11
1/08/04: 966-9
1/09/04: 823-11
Weekly average: 97.5%

1/12/04: 823-11
1/13/04: 684-8
1/14/04: 776-9
1/15/04: 788-5
1/16/04: 889-4
Weekly average: 98%

1/20/04: 1,142-8
1/21/04: 950-3
1/22/04: 846-7
1/23/04: 646-6
Weekly average: 98.5%

1/26/04: 796-7
1/27/04: 724-8
1/28/04: 511-9
1/29/04: 206-10
1/30/04: 286-5
Weekly average: 96%

The ratio started to turn neutral in March 2004 and we saw the first negative NH-NL ratio on April 14, 2004 when it finished at 102-135 (a major red flag). Looking at the chart for the NASDAQ (going back to 2003 and 2004), you can see that this ratio perfectly showed the start of the decline from March to August after the tremendous bull rally of 2003.

Now those are amazing and reliable readings!

Piranha

We witnessed our first negative daily New High–New Low (NH-NL) ratio since Wednesday, November 16, 2005 when it closed at 103-207. The NH-NL ratio closed at 88-93 on Tuesday as the market presented us with the fewest number of quality stocks making new highs since last year. I have been backing off of the idea that a “rally” has been forming as claimed by other market sources and I have pointed to my three main indicators to explain why I have been playing defense since early February. Below I have listed some of the quotes that I made on the weekly screen from 2/11/06. On Monday, the NH-NL ratio finished at 271-77.

I have pasted the weekly NH-NL numbers from that week in November to show you what the market looked liked back then.

NH-NL ratios from :11/14/2005 to 11/18/2005
Monday showed a ratio of 275-130
Tuesday showed a ratio of 152-183
Wednesday showed a ratio of 103-207
Thursday showed a ratio of 297-147
Friday showed a ratio of 415-106

Below is an updated look at the weekly averages for the NH-NL Ratio:
Saturday, October 1, 2005: 255-116
Saturday, October 8, 2005: 197-144
Saturday, October 15, 2005: 46-317
Saturday, October 22, 2005: 73-220
Saturday, October 28, 2005: 111-162
Saturday, November 5, 2005: 241-93
Saturday, November 12, 2005: 231-111
Saturday, November 19, 2005: 248-155
Saturday, December 02, 2005: 312-73
Saturday, December 10, 2005: 309-77
Saturday, December 16, 2005: 293-104
Saturday, January 7, 2006: 473-47
Saturday, January 14, 2006: 500-32
Saturday, January 21, 2006: 348-46
Saturday, January 28, 2006: 516-46
Saturday, February 4, 2006: 449-44
Saturday, February 11, 2006: 229-57
Saturday, February 18, 2006: 306-42
Saturday, February 25, 2006: 420-36
Saturday, March 4, 2006: 399-49

2/11/06 Weekly Screen Quotes:
“A few weeks ago, I held six traditional stock positions and have been forced to sell all but two positions.”

“As I said above, I have been locking in profits and moving to cash.”

“This week, the ratio averaged 229 new highs per day, the weakest number since the week of October 28, 2005 when we had a negative ratio. The new lows gave us the largest average since the week of December 16, 2005 when it was above 100 stocks per day. Above everything else, I turn to the NH-NL ratio to gauge the strength among the leaders and I allow the ratio to help me decide when it’s time to use margin and when it’s time to start moving to cash (and vice versa).”

The chart in this blog post shows a graph that highlights the strength and weakness on the NH-NL ratio during the second half of 2005. I will update the graph with the latest data and post it up tomorrow. To calculate the percentage correctly, use this formula: (New Highs – New Lows) / (New Highs + New Lows) * 100 = X%

Piranha