Multi-bagger series - Introduction: Part 1
Multi-bagger stocks on how to identify and handle them
Greetings!!
Happy Thanksgiving to you all!!
IntroductionIn this post series, I will be covering on how to handle multi-bagger stocks. Multi-bagger means, stocks run-up like 100% to 5000% plus run in weeks or months or years. These series will cover on how to identify, classify it - so you can position accordingly(risk management), what type of trade it can be performed, how to manage it - short or long-term trade, initial position, add-on, sell on strength and exit completely. I will be using different model stocks to explain the concept.
I am making an assumption that the total trading account value(aka Portfolio Account Value) will be $100,000. We want to use this as a base to on how to manage different kinds of stocks. Typically, with growth stocks investing, we want to limit the exposure to 4 stocks for this account value to concentrate and manage the trade (Portfolio Management). That means, we want to limit the total trade value to a stock to a maximum value about $25,000. These are guidelines. As you gain experience you can expose to only 1 or 2 stocks in a real good market. These are for highly experienced and skillful traders not for novice.
As you buy the stock, out of $25K, you might a little like $5k or $10K or all $25K depending on the stock and market condition. Mostly, you will do like 50% of 25K then keep adding as the stock proves itself referred as pyramid buying(aka Position Management).
As you buy the stock, it can be a wrong pick and it can go completely against your buy - immediately or in few days or weeks. The most important cardinal rule is to cut the loss. DO NOT INCURR LOSS MORE THAN 8% OF YOUR BUY. Also, once you have a gain, NEVER EVER turn into loss. (aka Risk Management)
These are foundational principles and I keep it simple and adhere to it.
For every monster stock move or run-up, below are the broad category of classification or reasons why the move is occurring or occurred. The stocks can be IPO or a matured stocks.
As the stocks breaks out for any of the above category, typically they go through 4 stages. These stocks Stage Analysis is a strategy for longer term trend trading. It is discussed in detail by Stan Weinstein in the book Secrets for Profiting in Bull and Bear Markets. Stan uses Stage Analysis using chart patterns to describe four distinct stages that a particular stock trade can be in. Readers Digest version of it - NextBigTrade [ my classic model is JKS in SEP 2020, met all criteria of the stage 2 breakout ]
I typically see what stage the stock is in for me to plan the portfolio management and position sizing. Of course, risk management too, I will cut the loss aggressively if needed on a late stage bases. A simple strategy for short and long-term trend trading - you really want to trade in stage 2. As the stock breaks out of stage 1, it will continue its momentum in stage 2. In this stage the stock is in its absolute momentum to perform a considerable run up. YOU REALLY WANT TO TRADE STOCKS IN STAGE. Reminder, trading is a speculative game with controlled risk. Trading stocks in stage 2 helps to stack odds in your favor. Smartly, exit in stage 3 or trade carefully if it is stage 3 and AVOID stage 4 & 1 at any cost, it will be mental drain.
In the next set of series, I will cover each category and explain the concept of portfolio, risk and trade management using a model stock.