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Position Sizing: Key to Maximizing Returns

In a time when market volatility and equity preservation is of utmost importance, determining the correct number of shares to buy, or “position sizing”, is key to maximizing returns and minimizing risk.

The common investor generally doesn’t spend much time thinking about how many shares to buy or how significant of a position to take.  Instead, most investors use a common methodology of trading the same number of shares each time, which usually translates to a specific dollar amount.  Other, more sophisticated investors, opt to allocate a certain percentage of their portfolio value to a specific position. Following this train of thought, a new position in a portfolio of $100,000 would transcribe either a $10,000, or 10%, investment or a usual position of 50 shares.

Although these methods may work for some, using the volatility of a specific portfolio is likely to be the most effective decision tool.  Measuring a portfolio’s overall volatility enables an investor to decide on what percentage of that portfolio he is willing to risk losing on the new position.  This methodology is better explained through the following example. Read More…

A New Risk Indicator To Sidestep Market Downturns: Is It Better Than VIX?

By Chris Georgopoulos, originally published on 11/14/11

Without question the most popular model to predict market crashes is the VIX, commonly referred to as the “Fear Gauge,” a market index that measures the implied volatility of the S&P 500 index options. Its concept is quite simple, when the uncertainty and fear among investors rises, they commonly run to the S&P 500 options to either hedge or speculate. The increased interest in the options usually leads to higher premiums and as the premiums increase so does the VIX. However, predicting the future isn’t 100% accurate, most of the time it’s not even close. Every forecasting model has its flaws and the VIX is not an exception. There are many problems skeptics have found with the VIX such as; its population study is limited to only the 500 stocks of the S&P 500 and” {the} model is similar to that of plain-vanilla measures, such as simple past volatility” (Wikipedia). A blog post on summarized the VIX as “simply an indicator of actual volatility in the market but one that is very sensitive to changes in actual volatility particularly if it is on the downside.” Is there a better way?

An elementary statistics theory states that the larger the population size, the greater the likelihood that the sample will be represented. If markets are graded by the performance of popular indexes such as the S&P 500, why limit a forecasting model’s population to only 500 stocks? The economy has become global; interactions from every corner of the world’s businesses affect every other business. If there is a model that forecasts market direction, should it limit itself to just the largest companies? As for only using a month or two of short term option premiums to garner a prediction, as the VIX does, it seems to limit itself to only a single variable. Instead of short term options premiums and limited samples what if we could measure real-time individual stock trend alerts on thousands of domestic and foreign stocks and ETFs? Or simply what if we analyzed the micro components (every stock) to develop a macro forecast of the market based off trends and risk?

By studying the history of risk alerts from, an intelligent risk management service, two proven alternatives to the VIX were found. has developed their own proprietary risk model that monitors the trends and risks to over 4,000 of the most popular stocks and ETFs. If the risks grow on any individual investment alert their subscribers with both long and short term exit triggers. However not only do these alerts help individual and institutional investors manage specific investment risk, the reviews of the alerts themselves have predictive capabilities. By back-testing every alert that has issued from their inception versus the S&P 500 performance, there is proof of this and the results speak for themselves.

There have only been 7 days for which the amount of Long-Term Exit Triggers (stop alerts) as a percentage of every stock and ETF covered by has been over 20%. The subsequent market action of the S&P 500 has averaged a negative return for the time periods of 1 week, 1 month, 3 months, 6 months and a year. The 6 month average return is over -7% and when examined from the absolute lows of the S&P 500, the returns average over -19%. If you remove the knee-jerk market reactions caused by “Flash Crash” on 5-6-2010, the returns are even lower.
Another metric offered by is their SRBI(tm) (SmartStops Risk Barometer Index); this index measures the current percentage of stocks and ETFs that are in “Above Normal Risk” state (ANR) divided by the 100 day average above normal risk percent. By definition, a stock that is listed ANR experienced a risk alert as its last SmartStop alert identifying a downtrend. Conversely, a stock that is listed in a “Normal Risk State” experienced a reentry alert as its last SmartStop alert indicating trading strength and an upward trend. Back-testing historical SRBI data since inception shows that the repercussions to the market when the percentage of downtrends increases to over 40% of all stocks and ETFs covered are profound. Below you will see that there have been only five occasions where this has happened. In each case the S&P returns for the following year were all negative.

Is this a better way?

Before a concrete conclusion can be determined, the predictive capabilities of the VIX must also be analyzed. Read More…

NETFLIX Investors – Did you Protect Yourself?

NETFLIX , NFLX, drops but SmartStops keeps investors and traders from major losses.

This is why Risk Management and Protection are a must in every investor and trader’s arsenal.   SmartStops triggered its short-term protection for Netflix at $74.13 at 9:32AM.  NFLX closes at $60.28 today, 7/25/12.

In the most recent Netflix downtrend SmartStops saved its clients  $42.46 per share!  

See chart at: Teams With TradeKing to Facilitate Risk Management

San Francisco, California, July 11, 2012–, an online service that helps investors of all levels manage investment risk, announced today that the SmartStops BrokerLink service is now available for clients of online broker-dealer, TradeKing.

The SmartStops BrokerLink service makes it easier for investors to monitor the risk states of equities held in their brokerage accounts, as well as facilitate the placement and management of protective stop loss orders.  Using the TradeKing Applications Programming Interface (API), has made BrokerLink available for TradeKing clients. Now, with a click of the mouse, TradeKing clients can synchronize their portfolio with their TradeKing brokerage account positions.  The SmartStops BrokerLink service also provides a simple protective order management screen that makes it easy to update multiple protective orders at the client’s brokerage account at one time.

“At SmartStops, our goal is to help investors of all levels recognize when their risk exposure changes and facilitate timely action with the aim of protecting assets and improving returns,” said Chris Conway, Director of Product Management, SmartStops.  “TradeKing’s open, advanced API made it possible for us to offer the SmartStops BrokerLink service to their client base of active, self-directed investors.”

Kevin Delo, Senior Vice President of Product Management at TradeKing noted, “In today’s volatile market, it is more important than ever to manage risk exposure.  We are pleased to be working with SmartStops to bring this innovative approach of risk management to our clients.”

TradeKing clients who wish to take advantage of the SmartStops service to monitor their portfolios for changes in risk exposure can create a SmartStops account by visiting the TradeKing Special Offer Page.

About ( provides a simple to use solution helping investors of all levels manage investment risk. SmartStop risk alert prices are calculated and published each market day for stocks and ETFs. If your equity falls and triggers its SmartStop, consider taking protective action.  It’s that easy.  For more information visit or email SmartStops at

About TradeKing

TradeKing ( is a nationally licensed online stock and options broker offering simple, low cost online trading fees ($4.95 per trade plus $.65 per option contract).2 A pioneer in integrating new financial social media as part of its innovative online equities, options trading and fixed-income trading platform, TradeKing has received multiple discount broker awards from top industry sources and was rated best in customer service by SmartMoney2 Magazine, ahead of OptionsXpress, Scottrade, Fidelity, and TD Ameritrade. (June 2012 SmartMoney Broker Survey).

Follow TradeKing on Twitter at,
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Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standard Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. The content of this press release is provided for educational and informational purposes only, does not constitute a recommendation to enter in any of the securities transactions or to engage in any of the investment strategies presented herein, and does not represent the opinions of TradeKing or its employees.

Advanced orders are placed at TradeKing on a Not Held basis. When the conditions are met they are automatically released to the market as open orders. Certain advanced orders may not be eligible for execution when the condition is met (for example: you do not have enough buying power in your account). You solely are responsible for managing your orders to avoid errors, and the costs associated with the resolution. An advanced order can be held indefinitely until you decide to cancel it. Please note that advanced orders are particularly exposed to the risks derived from system malfunction and disruptions. Read a more descriptive disclosure about Advanced Orders.

Online trading has inherent risks due to system response and access times that vary due to market conditions, system performance and other factors. An investor should understand these and additional risks before trading.


(1)               TradeKing was ranked #1 in Customer Service in the SmartMoney June 2012 Broker Survey based on the following categories: Commissions and Fees, Mutual Funds & Investment Products, Banking Services, Trading Tools, Research, and Customer Service. SmartMoney is a registered trademark of SmartMoney, a joint publishing venture between Dow Jones & Company, Inc. and Hearst Partnership. Supporting documentation for any claims, comparison, statistics, or other technical data, will be supplied upon request by calling 877-495-5464 or via email at  

(2)        $4.95 for equity and option trades, add 65 cents per option contract. TradeKing charges an additional $0.35 per contract on certain index products where the exchange charges fees. TradeKing adds $0.01 per share on the entire order for stocks priced less than $2.00. See our Commissions + Fees page at for details on commissions on low-priced stocks, option spreads, and other securities.

How Can Advisors Build a More Modern Portfolio?

Originally published By Matt Ackermann on May 16, 2012 at  

SmartStops comment:   The fear of investing in traditional assets due to volatility can be minimized for an advisor’s clients by the use of a SmartStops methodology.  SmartStops was created because of the need for a more Modern Portfolio approach that could better manage traditional assets.      

 How Can Advisors Build a More Modern Portfolio?

Following a pair of bear markets, advisors know the days of buy-and-hold investors with 60/40 portfolio allocations are over.

From the mass affluent to the ultra-wealthy, investors want more than just equities and fixed income in their portfolios. Clients expect their advisors to bring innovative alternative investments to the table.

“A lot of investors and advisors have moved their assets to cash or into lower yielding asset classes,” said David L. Giunta, the president and chief executive officer of Natixis Global Asset Management’s U.S. distribution. “To get them off the sidelines, advisors can’t just bring these clients back to traditional approaches. There is just too much volatility.”

According to the 2012 Natixis Global Asset Management U.S. Advisor survey, the global financial crisis and uncertain market recovery has accelerated interest in alternative investing. According to the survey, 49% of advisors are uncertain that the traditional 60/40 allocation between stocks and bonds is still relevant, and 23% said the traditional approach isn’t close to meeting the needs of investors in contemporary markets.

But if a 60/40 allocation is no longer relevant, what is the right mix?

Dick Pfister, an executive vice president and managing director of global sales and consulting at Altegris Investments, A La Jolla, Calif., based provider of alternative investments, said modern portfolio theory has shifted dramatically in the past decade. He said that large institutional investors and endowments have “dramatically” increased their allocation to alternative investments.

According to a national study of endowments by the National Association of College and University Business Owners, the average endowment had 52% of its portfolio investments in alternative assets in 2010, up from 24% in 2002.

Pfister said he doesn’t expect advisors to shift their portfolios that dramatically, but anywhere from 10% to 35% of an individual investor’s portfolio should be held in alternatives.

“We are seeing a lot more on the upper end of that range,” he said. “With more mutual funds trading like hedge funds, more people are allocating to the alternative space.”

Giunta said clients are getting more comfortable with alternative investing because more alternative options are available within the comfortable and familiar confines of a mutual fund, but he says the right portfolio allocation varies on a client-by-client basis.

“We have to create portfolios based on each risk and volatility scenario,” he said. “Advisors need to talk to their clients and understand how much of a dip they can stand. Advisors need to be having those conversations and educating their clients about a variety of alternative options.”

Read More…

In Defense of Market Timing – a study that will shock you!

SmartStops comment :  As we dig up other studies we’ll add to article.  

Missing Best and Worst Days in Stock Market 1984-1998

 The article was originally published in 2008.    

SmartStops  comment  on 08/4/11:    Markets have dropped 9% in last nine days with the whole debt ceiling “show” going on in U.S.  government.   Do you think you needed to have given back your gains?   Think again!

Market timing is the art of making investment decisions using indicators and strategies to observe and determine the direction of prices. Many believe that market timing involves predicting the future, when in reality, the goal of market timing is to participate in periods of price strength and avoid periods of price weakness.

The general investing public has been told that market timing is a high risk proposition. Most of what has been written about the topic focuses on its failure and the risk investors take when trying to time the market. A typical study focuses only on the negative consequences of missing a few particular up days in the market – calculating the negative financial impact of missing those days and concluding that attempting to time the market is foolish. The biggest fallacy with these studies is    Read More…

A Managed Approach For Investment Portfolio Risk

Is your investment portfolio more like a roller coaster with no exit strategy, just going round and round and up and down, arriving right back to where it started? Don’t just go along for the ride, use a managed approach to limit downside risk and to capture gains. Incorporating a managed approach to risk with standard portfolio management methodologies will put you in the driver’s seat. Some common portfolio strategies that many of you are familiar with are diversification, buy and hold, stop losses, and the last and least effective strategy that many of you may be using, I like to call management by loss aversion behavior. Using a managed approach to risk within any portfolio strategy is easier with the proper tools.

Managing Risk With A Diversification Strategy
Managing portfolio risk through diversification is usually achieved by investing in a variety of equities that are negatively correlated such as large cap stocks, commodities, emerging markets and global equities. Recently though, it’s becoming more difficult to achieve this type of diversification as correlations aren’t constant and many global markets are becoming more similar to U.S. markets.

Reviewing sector risk is a good way to manage risk when using a diversification strategy. Investors can allocate funds to equities in leading sectors which are experiencing lower risk within the overall economic environment. There are many tools available for measuring sector risk including a free tool called the SmartStops Risk Ratio (SRR)™, useful in identifying the magnitude of risk by sector. For example as of March 26th, 2012, the healthcare sector on SmartStops Risk Ratio (SRR) is showing a 30% risk factor meaning 30% of equities in this sector are in an above normal risk state. If we further research using this tool, we find that the telecommunications sector has a 64% risk factor, meaning 64% of equities in this sector are experiencing above normal risk. In this scenario, an investor could rotate out of the telecommunication sector and focus on the healthcare sector, selecting individual healthcare stocks that are currently in the normal risk state.

Many investors choose individual stocks with either a growth or value objective in mind. Growth stocks are corporate stories with rising sales and profits and usually dominate their marketplace. For example, if you buy a stock for its growth potential, review the risk possibilities through data and risk charts. Data might include new information regarding large expenses allocated to expansion, often called “return on invested capital”. Return on invested capital measures whether companies can find profitable projects to inject future growth. A value objective focuses on underpriced bargains which investors expect will return to a “normal” state. A risk chart with re-entry trigger points provides valuable information for knowing when to buy an underpriced bargain.

And don’t forget the number of stocks that you should be holding in your portfolio to assist with risk reduction. In today’s markets, it takes even more positions to achieve a lower risk based on diversification alone. According to Rodney Sullivan, editor of The Financial Analysts Journal, “as recent as 1997, whereas it used to take 20 stocks to eliminate most of the likelihood of enduring more risk than the market as a whole, today, it takes 40 stocks to diversify.”

Managing Risk With a Buy and Hold Strategy
Investors have been taught for years that a buy and hold strategy for portfolio management is guaranteed to outpace the market when comparing rates of return. However, the amount of risk a stock is experiencing has no relation to time and holding the stock for an extended period of time does not eliminate the risk associated with that particular stock. To best manage for risk, if you’re using a buy and hold strategy, one must know when a specific stock is experiencing unusual risk and be willing to sell. Putting your hard earned money to work in a stock that has a normal risk state will achieve higher returns in the long run. On a risk chart provided by SmartStops, if you were invested in Netflix, Inc (NFLX) prior to 2011 and had sold at any of the 6 alert signals from Dec. 2010 until Jul 26, 2011, ranging in price from $184.92 to $262.85 per share, you would have saved yourself from a significant loss. Today, the share price is still hovering around the $120 range. Within the buy and hold strategy, without managing for risk, you would have just ridden that roller coaster down and then hopefully back up again.

Managing for NFLX risk, you could have exited the ride at the first risk alert, waited for the ride to bottom out, and then repurchased at the reentry price (triggered at $81.00 on Jan 5, 2012), thereby increasing protection on your NFLX capital and significantly increasing your returns.

Managing Risk With a Stop Loss Strategy
Managing an investment portfolio using a stop loss strategy is effective. The difficulty lies in correctly identifying the optimum exit points. Choose an exit too close and you could be exiting prematurely and an exit choice too far away gives up significant gains before your protective exit triggers. Optimized exits should be tailored to each individual equity, taking into account its daily volatility and current trading pattern. SmartStops publishes updated optimized exits each market day and through its BrokerLink service, maintains stop loss orders with broker partners such as TD Ameritrade and TradeKing. Using an automated risk assessment decision tool that intelligently adjusts each day for the optimal exit and re-entry points manages risk effectively and more profitably.

Managing Risk With Loss Aversion Behavior Strategy
Managing a portfolio using loss aversion behavior is not a very effective strategy but one that many investors utilize. When purchasing a stock, we often become not only financially invested in the equity but also psychologically invested. As a result, we view the act of selling this equity as an admission of guilt of a poor decision. Instead, we often look for information to validate our initial buying decision, even in the face of losses and overwhelming evidence to the contrary.

By trying to find information that confirms the buying decision, investors discount other meaningful information and often hold the loser position hoping for a rebound. Investors could eliminate the loss aversion behavior by taking the emotion out of the investment and relying on analytical tools for direction. SmartStops is one of the few companies offering an automated risk assessment decision tool that notifies investors when a stock is experiencing unusual risk. With the information gained in the risk alert, the investor can then do further research and make a rational, timely decision based on facts and not on emotion.

Whichever investment strategy you choose to use, further manage the risk within your portfolio. Don’t get taken for a ride.


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