Stock Exchange: Do You Trade Big Or Small?

The Stock Exchange is all about trading. Each week we do the following:

  • discuss an important issue for traders;
  • highlight several technical trading methods, including current ideas;
  • feature advice from top traders and writers; and
  • provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review: Where Do You Go For Trading Ideas?

Our previous stock exchange asked the question: Where Do You Go For Trading Ideas? We noted that market dynamics had been increasingly showing signs that are conducive to our momentum trading models, and we had been entering new momentum trading positions. We also argued that just as it’s important to find a trading style that is conducive to your needs, it’s also important to find sources of trading information that do the same. We asked readers to share a few of their favorite sources for trading information.

This Week: Do You Trade Big Or Trade Small?

Many market participants draw the sharp distinction between trading and investing, whereby the main difference is time frame (i.e. investors often have a much longer holding period than traders). However, what are some of the differences among trading approaches? Specifically, do you trade big or do you trade small?

Position Sizing: Perhaps the single most important rule of trading is to avoid excess position sizing. More specifically, if your trading positions are too big then you are exposing yourself to too much risk. But how big is too big? A couple generic rules of thumb are “never risk more than you can afford to lose,” and “always live to trade another day.” According to Cory Mitchell’s recent article, Determining Proper Position Size:

“You can have the best strategy in the world, but if your trade size is too big or small you’ll either take on too much or too little risk.”

The article goes on to explain some specifics about position sizing. How big do you allow your individual trading positions to get?

Macro versus Micro is another important consideration when determining your trades. For example, do you trade binary macroeconomic events, such as the outcome of big meetings between major economic diplomats? Or perhaps you were placing trades around the outcome of this week’s Fed announcement? Our rule of thumb with regard to macro is to avoid big binary events unless we feel we have some specific insight. We’ve written in more detail about trading binary events in a previous Stock Exchange: Do You Trade Binary Events? However, we also recognize the attractiveness of trading specific securities with powerful microeconomic idiosyncracies distinct from overarching macroeconomics, and we’ll share some specific timely examples later in this report.

Cash Level is another important “big or small” trading consideration. For example, do you keep a lot of cash on the sidelines so you have dry powder when attractive opportunities arise, or do you stay fully invested at all times so you don’t miss out on any big market gains? From our perspective, knowing when to place trades versus when to hold cash is critically important. Specifically, our momentum models went to all cash early this year because market conditions were not conducive to their approach (i.e. for risk management purposes). And these models have only recently started to dip their toes back into some trades.

Model Performance:

We are sharing the performance of our proprietary trading models, as our readers have requested. For reference, the models are still only 1/3 invested (the rest is in cash–for risk management purposes):

Controlling Risk:

We find that blending a trend-following / momentum model (Athena) with a mean reversion / dip-buying model (Holmes) provides two strategies, effective in their own right, that are not correlated with each other or with the overall market. By combining the two, we can get more diversity, lower risk, and a smoother string of returns.

Since many clients combine the trading models with our long-term fundamental methods, they have additional diversity of methods without the need for short-term timing.

For more information about our trading models (and their specific trading processes), click through at the bottom of this post for more information. Also, readers are invited to write to main at newarc dot com for our free, brief description of how we created the Stock Exchange models.

Expert Picks From The Models:

Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.

Holmes: I sold my shares of Canopy Growth (CGC) this week.

Blue Harbinger: Not bad, Holmes. I know you are a “dip-buyer” and you typically hold for around 6-weeks, so based on the following technical chart it appears you did quite well on this trade. Plus I am happy to see you are dumping this bad habit considering Canopy is a cannabis company.

Holmes: I appreciate your “attempt” at humor, Blue Harbinger, but I am a technical trading model, not a human; therefore I am not laughing. A lack of emotion is one of my advantages. Beside it’s not all that taboo anymore anyway.

BH: For someone who is a non-human, emotionless, objective trading model, it sure seems like you are getting a little bit of attitude with me. Regardless, here is a look at some Canopy fundamentals in this Fast Graph.

Holmes: And not only am I totally objective, but I am also a trader not an investor, so I’m not keenly interested in the long-term fundamental metrics you have shared. But thank you, nonetheless.

Road Runner: As you know, I’ve started dipping my toe back into some momentum trades in recent weeks, and I bought a few shares of Molina Healthcare (MOH) this week.

BH: Molina engages in the provision of health care services. Specifically, its Health Plans segment consists of health plans in 11 states, and its Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies. Why’d you buy, Road Runner?

Road Runner: I like to buy stocks in the lower end of a rising channel. Here is a look at what I am talking about for Molina.

BH: I see the shares are in the lower end of that rising channel. And I am glad you’re starting to find some good trading opportunities after mostly sitting in cash this year due to market conditions not conducive to your momentum strategy. Here is a look at the Fast Graph.

Felix: I sold my General Electric (GE) shares this week.

BH: I know your holding period is a lot longer than the other traders, Felix. Your typically holding period is around a 66 weeks. And based on the following chart, it appears you lost a little money on this trade, but it wasn’t horrible.

Felix: After an ugly 2018, GE had a bit of a rebound this year.

BH: It’s actually been a top performer this year. Here is a look at the Fast Graph.

Felix: Thanks, BH. Also, this week I ran the stocks of the S&P 500 through my technical trading model, and I have ranked the top 20 for you in the following list. As a reminder I am a momentum trader, but I hold for a longer time period than the other models–typically around 66 weeks.

BH: Signet Jewelers (SIG) is your top ranked S&P 500 stock this week. Interesting–it’s had quite a volatile ride to the downside, without much of a rebound so far this year.

Oscar: I have some ETF rankings to share. As our resident sector/ETF rotation model, this week I ran our “High Liquidity ETFs with price-volume multiple over 100 million per day” through my model, and the top 20 are ranked in the following list.


Whether it be macro versus micro, position sizing or cash levels, there are a variety of “big versus small” trading approaches to consider. We are very aware of macroeconomic conditions (particularly for risk management purposes) but often trade based on microeconomic security specifics. We also know that appropriate position sizing is absolutely critical for trading success (and to avoid “blow ups”). And as far as cash level is concerned, our models are still only 1/3 invested. How big and/or small do you get with your trades? 

Getting Updates:

Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome. Your can also access background information on the “Stock Exchange” here.

Trade alongside Jeff Miller: Learn more.

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