Find a Trading System That Suits You and "Execute It Resolutely"

We have shared through the previous series of articles the fundamental and technical aspects of stocks that I like, as well as how to quickly screen out a list of target stocks, and further analyze the volume-price patterns of individual stocks to confirm the stocks we plan to trade.

For more details, please follow: Seeking 10-Baggers Series Update: A Collection on Strategies, Methods, And Key Indicators

In the sixth article, we specifically conducted operational analyses for two situations: "first discovering a stock's breakthrough" and "observing a breakthrough in a familiar stock within the watchlist". In fact, regardless of which situation it is, the prerequisite for our trading is that "we have conducted relatively comprehensive research on the fundamentals of this individual stock and believe that its fundamentals will further improve".

Previously, we mainly solved the problems of "what to buy" and "when to buy". Next, we need to continue to address the issues of "how much to buy", "how long to hold", and "when to sell".

Okay, now we have decided to buy a stock A. However, even if we think that the fundamentals of stock A are excellent and the technical aspects also meet the requirements, we still need a certain trading system to regulate our operations. Because no matter how good the fundamentals and technical aspects are, they cannot guarantee that the stock will continue to rise.

First Point: How Much to Buy

In fact, everyone's capital amount is different, and we are mainly talking about most small and medium-sized investors. Although there is a famous saying in the stock market, "diversify your investments", for investors with not so large capital, it is impossible to buy too many stocks.

Suppose we have 100,000 Saudi riyals in capital. I think that under normal circumstances, holding 3 to 5 stocks is sufficient. On average, each stock is approximately 20,000 riyals, which is about 20% of the total capital, and we should reserve a certain amount of cash.

20,000 riyals corresponds to the maximum position of a single stock. But in specific operations, this position can be further subdivided. Generally, it can be divided into three parts. For example, when we see the breakthrough signal we are looking for, we buy one-third of the position. If the stock further rises after the purchase, we can seize the opportunity to add positions to reach the target position. Of course, if we are particularly optimistic about a certain stock, we can also choose to buy half of the target capital at once and then operate according to the subsequent situation.

Second Point: When to Buy? When to Add Positions?

Let's still take the stock Saudi Reinsurance Co.(8200.SA)  as an example. In January 2024, this stock showed our "breakthrough signal", and we could buy one-third of the position on the day we discovered it. Subsequently, the stock continued to rise for a while and then had a small correction, mainly moving sideways.

In February, the stock corrected to the 30-day moving average. During this period, the chips were fully exchanged, and the trading volume gradually decreased when it retested the moving average. This indicates that the selling pressure gradually decreased, and we could buy the second part of the position near the moving average.

From February to April, the stock first rose and then corrected again, and tested the "base" formed in February. Near this price level, the trading volume decreased again, and we could buy the third part of the position.

Up to now, we have already bought our target position. Next, we need to continue to track the stock's trend and changes in its fundamentals and carry out the next step of operations.

Third Point: What to Do if the Stock Drops After Buying?

The previous example is a successful case. But in fact, the probability of our successful purchase is far lower than we imagine. Then we need to protect our capital through other means when the stock's performance falls short of expectations, and that is "stop loss in a timely manner".

Here, we need to further divide it into two situations. If the stock starts to decline as soon as we buy the first part of the position, when the decline reaches a certain extent, no matter how optimistic we are about this stock, we should withdraw first and re-evaluate the stock. And the setting of this decline percentage varies from person to person. However, according to the experience of trend investment masters, it is more ideal to set this number at 8%. If we are particularly optimistic, we can set it at 10%, but it is not recommended to set it higher.

We can assume that when the stock drops by 8% after we buy the first part of the position, according to our 20% maximum position and position allocation, in fact, we only lose 0.53% of the total capital. And assuming that we have already bought 20% of the target capital, an 8% stop loss can also control our loss within 1.6%, which is completely manageable.

The second situation is that we made a profit after buying the first part of the position, but the stock started to decline after we added positions. What should we do?

In this case, we can regard the second position addition as an independent transaction. That is to say, set an 8% stop loss protection for the price of this added position as well; we can also combine the two transactions. The cost price after the second position addition is generally higher than that of the first one, and reset the stop loss protection based on this comprehensive cost price. This can also avoid incurring too much loss.

Of course, because the first operation is profitable and we have floating profit after the second position addition, when this floating profit is considerable (for example, exceeding 10%), we can also set the cost price as the protection price. In this way, no matter what happens, we can ensure that this transaction will not result in a loss.

"Learn to protect your capital first, and then strive for profit" is the core of setting trading points and position management.

Fourth Point: When to Take Profits?

We have already talked about the situation of stop loss above. Suppose we have made a successful transaction, when should we sell to take profits? This also requires discipline.

We can set a profit target. For example, we can take all profits when the profit exceeds 30%. This profit target varies according to different stocks and also according to our different understandings of the stocks. In short, set a target and firmly implement it.

We can also take profits in batches according to the technical aspects, just like when we bought the stock. This is mainly to avoid the risk that the stock will continue to rise sharply after we sell all of it. Of course, on the other hand, it means that if the stock starts to decline after we sell a part of it, our profit margin will be reduced.

We can also operate according to changes in the fundamentals. For example, when the company's profit growth is insufficient, or other unfavorable fundamental factors appear, we can consider gradually taking profits.

In fact, there is no specific method that can be both risk-free and capable of obtaining all the profits. What we need to do is to set a reasonable plan and "resolutely implement" it.

Note: We are thrilled that you've made it to the end of this article. Our "10-baggers" series is scheduled to run for eight installments, with a new edition coming out every week. The primary purpose of this series is to share experiences and facilitate discussions among investors. 

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Disclaimer: The articles in this series are original works by the sahm team, primarily intended to share investment experiences for the exchange among investors. If individual stocks are mentioned within the articles, they serve solely as examples for discussion and should not be considered as investment recommendations.