The other day my editor’s daughter asked him,
“How much do clouds weigh?”

Here’s what they did—they measured the volume of her chameleon’s cage to see how many pumps from her misting bottle it took to create a fairly sized mist in the cage. After that, they measured the volume of water.

And then all they then had to do was work out how many chameleon cages fitted inside an average cumulus cloud.

Easy, right?

Fortunately, someone who knew what they were doing had already worked it out; a cloud weighs the equivalent of about 100 elephants!

Some things you can wing, but sometimes it’s a lot simpler to find someone who’s done it before.

The same is true of building wealth. And not just your wealth, but the wealth you pass down through the generations. All so that you don’t end up, according to the proverb, “Shirtsleeves to shirtsleeves in 3 generations.”

This expression refers to generational wealth evaporating — like a cloud in bright sunshine — as the years go by. But where does it all go? And in just three generations?!

James “Jay” Hughes explores how – and why – families can lose their grip on earned wealth, and why it seems inevitable. But he reveals the ways to prevent that and not only preserve, but to grow and enjoy wealth across multiple generations.

My interview with Jay will challenge your assumptions about building wealth! Building a lasting legacy of riches goes far beyond mere accumulation, and this eye-opening podcast will start you on that journey.

Join me and Jay as we walk the path of wisdom and wealth and explore the five balance sheets of wealth.

Listen to WealthWise with Jay!

Author: Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

 

Stops can be used to cut losses or secure profits. Some traders will actually put a stop order in… while others will use a “mental stop”. A stop order basically gets you out of the stock when it hits a specific price. 

A “mental stop” is just a level you wish to get out at, but you still have to physically hit the buttons to get out. 

If you place your stops “too tight” you can be out of a trade quickly. It can be especially frustrating if you get stopped out, and then watch the stock we were in—reverse in the direction of your trade. 

This can drive some traders crazy, forcing them to jump back in, churn their account, or even revenge trade.   

But it shouldn’t… 

Getting stopped out is a normal part of trading… sure it’s hard to shrug off.

Not every trade will be a winner. 

Now I bet you’re thinking, there’s nothing to do but just take the loss and move on?

Not so fast… 

You see, there are some strategies that you can apply to improve how and where you place your stops. It’s a rules-based approach that I believe can save you a lot of money if you just hear me out. 

Not only that, I’m going to show you what the most common mistakes people make with setting stops… and how to button them up.

 

What is a stop loss order

 

First…what is a stop loss order and what does it even do?

A stop loss is an order that helps to protect your trading capital when the price moves against you.

An example:

You buy SPY at $337/share and you have a stop loss order at $320.

This means that if the price of SPY drops to $320, you will exit the trade and limit your loss to $17/share.

And if you use a stop loss correctly:

  • A stop loss prevents you from blowing out your trading account
  • Allows a trader to “live and fight”
  • Limit your losses to paper cut size 

 

Common issues of using stop orders

 

But I know what you’re thinking… the markets “hunt” my stop-loss order.  

Let me change your mind and debunk the major issues using stop loss orders.

 

Issue #1 : My stop-losses are “hunted”

 

Stop losses are not “hunted” by the markets or the brokers.

Why?

Because it’s not worth the regulatory nightmares that it will cause them!

Many times the markets will sell off to levels where other traders have their stop levels set.

Such as this example in the SPYs:

 

 

As you can see… if you placed a stop order below the prior pivot, you would have been out of your long trade just to watch the market move without you.

Why does this happen?

It happens for two main reasons:  

  • The market doesn’t have buyers entering the market since they already bought in at the prior pivot price to dampen the selling pressure
  • If there are new buyers coming into the markets, they are trying to get the best possible price, and will target prices under prior pivot levels.  This is a symptom of herd mentality.

So there you have it…

Now you know why your stops seem to be triggered by “stop hunters” but in actuality, they are actually triggered by other market traders.

 

 

Issue #2 : Stop loss should be based on account size

 

So an account based exit rule is just a way to exit if you lose too much money.

For example, 

The stop rule: exit position if losing 3% of initial capital.

This is one of the worst ways to place stop orders, yet it is taught in almost every trading 101 handbook.

Why is that?

Because it is simple and easy to communicate with new traders.

So what’s the solution?

Next…

 

How to set a stop loss like a pro?

 

Since not all stocks are created equal, a simple way to solve this is to use an indicator to offset the price that is unique per stock.

The solution?

It’s best to use the value of the ATR to offset the stop level.

Let’s take a look at how that would have worked on the SPY trade from earlier.

 

 

As you can tell, you were never stopped out of this trade and were able to capture the oringial move higher.

Why did this work?

For a 2 Reasons:

  1. The stop doesn’t follow the herd 
  2. It’s adapted for each stock’s volatility

So what does this mean?

This means you shouldn’t use a fixed stop loss under a pivot that the herd will be using as well.

Here is an easy to remember, 2 step technique that works…

  1. Identify market structure
  2. Offset stop losses using a stock-based indicator

The best part?

This can be used on any stock and on any timeframe.

Pro Tip:  Avoid using other common herd hard stop levels, such as areas of support and resistance without applying a stock-specific offset like the atr to the price level.  

Let’s take a look at exactly that.

 

1. Identify the market structure

 

Market structure refers to things like Support, Resistance, Trendlines, Moving Averages, etc.

This structure acts as a barrier and makes it difficult for the price to go through.

For example, let’s think of support as a barrier that keeps price from going lower.

The key about this is identifying the market structure and setting up your hardstop levels prior to placing a trade.

 

 

2. Set up the stop loss away from market structure.

 

Remember…

You don’t want to set your stop loss at the market structure directly since you will be “stop hunted” very easily.

Instead, you will need to give your stop loss some sort of “buffer” away from the market structure to give you the wiggle room needed.

Here’s how:

  • Find the current ATR value
  • Add the ATR value above market structure for short
  • Subtract the ATR value below market structure for long

Here’s what I mean:

 

 

You can see two things that happened quickly:

  • The stop loss without offset had the trade exited
  • The stop loss that was offset was still left on the books.

 

Conclusion

 

Remember, stop losses and risk management consist of 3 main components:

  • Distance to stop loss
  • Risk per trade
  • Position sizing

Pro Tip:  If you’re a serious trader, you’ll only risk a fraction of your capital per trade to avoid being blown out with a major loss.

A final word of caution on stop loss placement…

There is no perfect stop loss placement, since trading is all about playing the percentages.

Here is a recap of what was covered:

    • A stop loss protects your capital when the markets move against you
    • You want to avoid using static stop losses based on dollar value
    • You want to avoid using a market structure stop loss without an offset
    • It’s always best to add a offset to all offset levels, typically using ATR values
  • If you have tight hard stops, you can increase your position size to maintain constant risk
  • Best trading opportunities are typically found near market structures because you can have a tighter stop loss

 

Author: Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

Hey team,

The coronavirus continues to spread as the death toll from the outbreak reaches 1,800. 

In the latest news on the outbreak, a Wuhan hospital director has died from the virus — proof that the medical staff themselves are overworked and overstretched.

In times like these, the need for medical training and improved medical procedures in China is at an all-time high. The medical staff needs more resources at their disposal. 

Right now, I have my eye on one IPO called Zhongchao (ZCMD), which tries to educate and train healthcare professions and provide healthcare information in China.

Their information services are available both online and onsite, and their training includes classes on popular medical topics and academic conferences and workshops, as well as articles, case studies, and short videos. 

As education has shifted over recent years and moved increasingly online, Zhongchao shows a lot of potential. Their number of registered users and review volume has been steadily increasing. 

The content available through their website includes medical theses, general commentary, conference coverage, and expert columns — all contributed by researchers and authors at leading Chinese medical institutions and curated by an in-house editorial team.  

Today, I want to dive into some of the company’s financial prospects and how a potential trade opportunity shapes up as the company conducts its IPO tomorrow.

 

Zhongchao Usership Is High, But Only a Small Percentage Are Paying

 

Chinese companies that IPO in the U.S. historically do not perform well, but the circumstances surrounding the coronavirus may stir investor enthusiasm for Zhongchao.

The numbers will tell the real story here though. 

1,429 training programs are available for free through Zhongchao and that number seems quite healthy as it contributes to a growing number of users. 

300,000 people are currently registered through the online platform and this gives them access to a database of over 2 million healthcare experts. 

One issue I see from a financial point of view, however, is that only a very small percentage of those users are paid subscribers and the loss of these subscribers could substantially impact company revenue. 

The number of customers is a mere 50, consisting of Chinese corporations and non-profit organizations. 16 of those customers were non-profits and 34 were pharmaceutical companies. 

 

With IPO One Day Away, ZCMD Could Be a Runner

 

Revenue nevertheless increased over the past year, as the company reported sales of $6 million and a 30% growth during the first half of 2019. Revenue for the past 12 months is $14.9 million. 

Zhongchao wants to use the net proceeds from the IPO to support online course content development and to integrate various apps and services in a way that makes the content more widely available for users. 

The anticipated launch price for Zhongchao is $4 to $4.50, but we could see that change, as the company is expected to price its IPO today. The interesting part about this IPO is the fact that there are only 3.5M shares being offered, and just about 25.1M total shares.

That’s a signal the stock has a low float, and it could be a runner if the demand is there.

For the most part, I’m just going to keep an eye on ZCMD, if it prices well above $5, I’ll keep an eye on it. However, if it prices at the midpoint or lower end of the range, I’ll look at the price action to see what’s up.

Sure the fundamentals are strong, but when it comes to smaller IPOs such as ZCMD, it helps to be patient and wait for more data to come out. If I do decide to trade ZCMD, I’ll be sure to let my clients know exactly what I’ll be doing with my simple green, yellow or red light trading system.

 

Author: Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

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