The Bane of Small Accounts

I don't trade stocks for a living... yet. I'd love to actually. But in order to trade for a living, one's account must be of sufficiently large size to achieve economies of scale in terms of brokerage costs and other fees. This is also to ensure that the gains would be sufficiently large in dollar terms to cover living expenses.

At the moment, I have about RM18,700 in my trading account, which by my standards is grossly inefficient.

Consider the following scenario that I have to go through before putting on a position:

Stock price: RM1.50
Pre-determined stop loss price: RM1.25
Target price: RM2

Dollar risk: RM0.25
Dollar reward: RM0.50


(Assuming I want a 2:1 reward to risk ratio)


The number of shares I can buy in order to adhere to the 1% equity risked per trade - (18,700*0.01)/0.25 = about 700 shares (rounded down and excluding brokerage).


Theoretically, my potential losses and gain would be:


700 shares x RM0.25 = (RM175)
700 shares x RM0.50 = RM350

BUT...

When you take the costs associated into consideration... assuming RM40 minimum brokerage, 0.03% clearing fee and stamp duty of RM1 for every RM1,000:

The net loss I would incur if the stop loss is triggered: (RM258.59)
While the net gain would be: RM265.26

Percentage loss as a proportion of total equity is 1.4%
While percentage gain is 1.4%

Which is NOT the 2% reward and 1% loss I was going for.

I'm sure I'm not the only one who's facing a similar problem. Below are a couple of solutions that I can think of that could remedy the above problem:

1) Increase trading account size (obviously) - Perhaps via saving more $ each month, not spending bonuses, pooling $ from family members and close friends, etc

2) Increase % risk per trade - instead of 1% .. increase it to 3-5% or more (be mindful that the larger the percentage risked, the bigger the potential of risk of ruin)

I'm still working on getting some funds from family members but that'd probably have to wait for now. The only option I have in order to achieve some sort of economies of scale is to increase my percentage risked per trade, which is not ideal at the moment.. considering the market condition.

So where does that leave me?

When there is nothing to do, do nothing - WB.

Bottom Fishing: 5 days on..

Following my previous post here, I said that bottom fishing based on that 3-day pattern would be very risky and was not recommended. Those who went long the FKLI at the close on the 21st and held it until yesterday would incur a loss of almost 50 points.

GPRO - Outperformer

GPRO - one of the few stocks that is actually performing well during this market downturn.

News that sparked the speculation frenzy: http://www.theedgemalaysia.com/highlights/192870-gpros-new-shareholders-raise-eyebrows.html

I was actually eyeing this stock when it breached the 12-12.5 sen level. But thanks to work commitments I didn't have time to properly look at it and I didn't want to be trading in such a volatile, bearish market environment.

In hindsight could be a costly decision but I'm not lamenting. Move on!

Bear, Bear, Bear

A close below the 1277 level would confirm that we are in bear market territory (calculated as 20% below year's high).

Bottom Fishing

Those who practice bottom fishing might be attracted to the last 3-day pattern. I'm not a believer though, too much risk involved.This might be a bottom but I'd rather see some form of consolidation before jumping in.

Portfolio Update.. Down 3.4%

As mentioned in previous blog posting, closed my PERDANA trade this morning at 66.

I began blogging with capital worth RM19,420. Taking into account the losses of the past two trades, equity is now down to RM18,754 - a 3.4% loss. An oversight on my part - I didn't take into account brokerage fees when calculating my position size.

Will remain 100% cash until I see signs of stabilisation.

Portfolio Update

FBM KLCI continued to be bearish today and my stocks hit their respective stop loss points. MMODE's stop was at 24 sen and PERDANA was at 66 sen.

I've already closed my MMODE trade but my broker called me a little late with regards to PERDANA, so I'm still long that stock with about 15% exposure. Nevertheless, I'll most probably cut if the bid is at 66 or higher tomorrow.

Initially I planned to risk only 1% for both trades. However, since I heard rumours that a large party was to take a majority stake in PERDANA, I decided to lower my stop loss point from 69 sen to 66 sen, just to give the trade a little more room. In hindsight, it was a costly decision. Perhaps I wasn't disciplined enough here. Nevertheless, if this stock acts bullish again in the future I would not hesitate to jump in.

I sold MMODE according to plan - although the brokerage fee is making it making me lose about 40 basis points more than I should.

Will compute my total equity once I sell PERDANA tomorrow.

Market Sentiment

Market sentiment is certainly pessimistic at the moment. You don't need complicated technical indicators to tell you that. Top concerns for investors include the US recession and the Euro debt crisis.

It's almost 10am and our FBM KLCI is down about 1%.

As far as I'm concerned - I have two possible option with regards to my investment strategy, depending on prevailing market conditions:

1) Bear market - If we are heading towards/are in a full-blown bear market, then the strategy would be to sit on the sidelines and keep stock exposure to the absolute minimum.Wait for signs of potential stabilisation before purchasing blue chip stocks.

2) A correction to a secular bull market - If we are in a correction to a bull market, however unlikely that may be, I might take small long positions if the FBM KLCI makes a huge rebound off lows. Exposure will be very small - ideally 20-30% of total equity.

1425-ish level is a key support. Besides the low on made on the 9th of August, it is also the 78.6% Fibo. Will be very interested to know what goes on when we test this level again.

I don't predict anything. I wait for things to move before I jump in. That might reduce my potential profits. But in terms of probability of success, this strategy generates higher %.

Portfolio Update

Nothing much going on with my portfolio at the moment. Both PERDANA and MMODE have not hit their respective stop losses. Due to the uncertain environment and the heightened expectations of recession , my net exposure of approximately 24% seems pretty comfortable at the moment. Not looking to increase my exposure for the time being.

I am actually wishing that we'll experience another bear market, so that I could pick up some good quality stocks at bargain-basement prices (Graham-Dodd-Buffet hat). TENAGA looks like its going to be on its way to the basement, but not quite yet in my opinion. Probably 3-4 more floors to go. The coal price issue will still be the deciding factor when investing in this stock. Other than that, it's a blue-chip monopoly - what more can I say?

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Currently I am in the process of obtaining more funds to manage from a few family members. Once that is complete my fund size should increase to around RM100,000. This will give me the required economies of scale in terms of brokerage fees as well as have a sizeable portfolio to manage and base to generate required track record.

I hope to one day manage over RM1 billion in funds, either via own company or as a fund manager in major fund houses. Dream the impossible. Desire.