The Magnetic Trader Workshop Part 3: The ‘Breakeven Carry’

In this lesson, you’ll learn how dynamic stop-losses and ‘phased’ profit targets can help you lock in gains on volatile stocks and lead to more profitable trades over the long term.

Welcome back to the Port Phillip Publishing Magnetic Trader Workshop.

Over these four days, you’re learning about the system I use to trade ASX-listed shares on the upside and the downside in any market condition.

This system has been battle-tested across multiple years, in rising and crashing markets, and we’ve had incredible success.

Now, it’s one thing making money in a soaring market. But it’s another thing when markets are incredibly volatile, like they have been the last nine months.

The ASX plummeted 36% in March in one of the biggest and fastest crashes of the last 100 years.

We took some losses on a few trades we put on shortly before the pandemic. That’s just part and parcel of trading. No system can completely eliminate risk.

But we can minimise it.

When the worst of the crash ripped through the markets, we had eight trades in total that closed out at breakeven — meaning we neither made nor lost money.

That is incredibly valuable. It allowed us to hold onto our capital and put it towards new opportunities.

And thanks to the risk management strategy I’m going to show you today, we closed multiple positions in profit during the worst of the crash, which would have seen huge losses with a buy-and-hold strategy over the same period:

  • Bravura Solutions closed for a 13% GAIN rather than a 14% LOSS.
  • Paradigm Pharmaceuticals closed for a 72% GAIN rather than a 20% LOSS.
  • Wisr closed for a 28% GAIN rather than a 56% LOSS.

Let me show you a complete breakdown of trades since I launched this system to private investors two years ago:

Wins

Losses

  • 72% gain on Paradigm Biopharmaceuticals
  • 13% gain on Bravura Solutions
  • 28% gain on Wisr
  • 6% gain on Resolute Mining
  • 82% up on McPherson’s Ltd
  • 23% up on Mortgage Choice
  • 46% up on Red 5
  • 145% up on West African Resources
  • 34% up on Newcrest Mining
  • 17% up on Paladin Energy
  • 77% up on SciDev
  • 68% up on Nine Entertainment Co
  • 219% up on Redbubble
  • 51% up on Lynas Corporation
  • 38% up on DroneShield
  • 33% up on Praemium
  • 12% up on Orocobre
  • 47% up on Telix Pharmaceuticals
  • 51% up on Panoramic Resources
  • 9% loss on BHP Group
  • 13% loss on Harvey Norman
  • 13% loss on Catapult Group
  • 20% loss on Structural Monitoring Systems
  • 27% loss on Pilbara Minerals
  • 26% loss on FlexiGroup
  • 37% loss on Alcidion Group
  • 50% loss on LiveTiles
  • 17% loss on REA Group
  • 6% loss on Telstra

Average win: 56%

Average loss: 19%

When you can consistently make much bigger returns than losses like this over a long time frame — even during the worst market conditions — you know you’re on to a good thing.

Now, I want to reiterate: This is past performance, which isn’t a reliable guide to the future.

But in this session, I’ll explain how my risk management strategy works, and how it helped my clients walk away with bigger, more frequent wins, and fewer, smaller losses, even during a crashing market.

Can you imagine seeing your trading account rack up those kinds of returns even when the market is throwing a wobbly?

Well, keep reading, because I’m getting closer to offering you the chance to start receiving my trading signals yourself.

So far, I’ve shown you how my system identifies tradeable ranges in price action and how it’s able to predict, with a good degree of accuracy, where prices are likely to change direction within that range.

I’m talking about the magic pivots and buy and sell zones I showed you in the last session.


Port Phillip Publishing

But — good as this is — that’s not all there is to a successful trading service.

A crucial element of any system is its ability to manage the risk in the trade while the position is open.

This has two benefits:

  1. If you don’t have to risk a lot of money to find out if you’re ‘right’ about a trade, this is great from a capital preservation standpoint.
  1. If you take part profits as the trade is moving up, it’s possible to secure a ‘break even at worst’ overall position, no matter what happens in the trade.

The markets, we can all agree, are risky.

Just look what happened during the coronavirus panic. The ASX was flying high in February before an astonishing 36% was wiped out in a single month — erasing six years of gains — and plunging us into our first recession in nearly 30 years.

That’s not good if you happen to be holding a particular stock that gets hammered. And it’s even worse if you’re leveraged, which many traders often are.

Well, today I’m going to show you how I manage risk in each trade, with the aim to at least break even overall if the worst happens.

It’s not a complete failsafe, and not every trade reaches this point.

But this approach can help you buy and sell with much more confidence, and potentially lead to more profitable trades by limiting your downside risk.

How to Limit Your Risks While Trading Volatile Stocks. Learn more.

This is the crux of my whole system

The method I’ve developed over my 20-year stock trading career is called the breakeven carry.

Let me explain how it works…

Every time I issue a trade alert to my clients, I’ll also give them an initial target price where they should take a partial profit.

Like the example I mentioned in our last session, when I issued a ‘buy’ on Newcrest Mining up to $23.20 with an initial profit target of $28.

If we hit that target, I’ll instruct them to move their stop-loss on the rest of the position to a breakeven level.

Now, you might have heard of a ‘breakeven stop-loss’ before.

Some traders will use them when a stock price is rallying by moving their stop to the level they bought at.

This protects them from going negative on a trade.

But what we’re doing is different — because we’ve already got profits in the bank. (See example.)

How to break even after we’ve taken a profit

  • Buy 3,000 shares at $5.00 ($15,000 cost).
  • Price rallies to $6.00 — we have made $1.00 on 3,000 shares or $3,000 profit.
  • I will send an alert to ‘Sell one-third of the position at $6.00 and apply a breakeven stop-loss on the rest.’
  • Sell 1,000 shares at $6.00 and bank $1,000 profit.
  • To break even on the whole trade, the 2,000 remaining shares will need to lose the $1,000 you have banked.
  • $1,000/2,000 = $0.50.
  • If the price of the stock falls $0.50 below the original entry price of $5.00 to $4.50, the remaining 2,000 shares will have lost $1,000.
  • So the breakeven stop-loss after hitting the initial target is $4.50.

After we sold a third of our position early, the remaining two-thirds of our position is going to need to fall even further to that breakeven point.

In fact, the price is going to need to fall BELOW where we initially bought it.

What this means is that after we’ve banked that early profit, we can afford to move our stop-loss down on the rest of our holdings.

This is a very important point.

This gives the price a lot more room to move.

Our new stop-loss can sometimes be lower than the stock has traded for months.

This gives you a lot more confidence that you’re not going to get shaken out of the stock at the first sign of volatility, which is especially important in today’s shaky market.

Now you’ve got what I call a ‘breakeven carry’ for the rest of the trade

I call it a ‘breakeven carry’ because now we can hold onto the remainder of the position and, if prices do turn down and start making new lows, then it hasn’t cost us anything to figure that out.

Now, I want to be clear: These targets are all figured out by my system before we enter the trade. My clients always know where to set their stop-loss, and where our first profit target is before committing to the initial trade.

The breakeven carry is the first target I aim to get to quickly with all my trades.

It’s vitally important for your mental state as a trader.

Once you get into a position where the worst that can happen is that you break even on a trade, you can relax. There’s no need to watch prices every day, worried whether you’re in the money or out of the money.

Many readers even write in to say how much they value the risk management side of my system.

Fordham wrote in to say:

I have taken 5 trades, all are in the money and none closed out with an average gain of 25%. Murray provides good entry points where there is value (buyers) coupled with a fundamental analysis. I also like his staged exits, taking profits along the way as a way to take away stress by reducing risk. I very much appreciate Murray explaining his methodology. It imparts confidence and I enjoy learning technical analysis from a professional.

ES said:

Murray does alright. I’ve followed him for a while now and it blows me away as to how he can get it so right (most of the time). The % of success is so much higher than that of the duds. It’s his focus on risk management that has saved me numerous times that was the difference between being in the positive rather than the negative.

Nicholas R wrote in to say:

What I like about Murray is that preservation of capital is important to him. His technical analysis, obviously honed over many years, is both detailed and impressive. His recommendations for trades are always carefully considered and I have made tidy profits on many of them. He is by no means risk averse but they are always calculated risks which are usually spot on. I thoroughly recommend his service.

Let’s have a look at this in the context of one of my recent trades, Wisr Ltd.

This is in the fintech space, an exciting area of the market with lots of potential growth.

You can see the large pullback in price indicated by the arrow.


Port Phillip Publishing

Remember, from our first few lessons, that this tells me that a range is about to form.

That range gives us the top and bottom, the point of control, and the buy and sell zones where there’s a good chance that prices will turn back to the centre.

For me to be convinced the price is turning back to the point of control, I need to see a buy pivot within that buy zone down at the bottom. And that’s exactly what happened, as you can see below:



Port Phillip Publishing

We entered Wisr at 14.5 cents, when it made the buy pivot circled on the chart above.

I told my readers to set a stop-loss of seven cents because it’s such a volatile stock.

The last thing you want is to set a super-tight stop-loss in the beginning and get shaken out of the trade straightaway.

Our initial target was up at 21 cents, which we hit and took a 44% profit off the table, because that’s right in the sell zone at the top.

And I want to make sure that I’m taking my part profit in a spot where the risk is high that we may see a reversal.

But Wisr continued to run. We saw a massive rally and we were actually up around 100% within six weeks of entering the stock.

Port Phillip Publishing

This was around the time that the coronavirus panic was creeping into the markets.

So, I sent an alert to my clients, telling them to sell another third of their position up at 28 cents for a 93% profit.

After we’d locked in that gain, Wisr could now crash and liquidate, and we’d still walk away with a profit.

That gives us peace of mind with the rest of the trade.

That’s why it’s so important to have a system like this

The first profit target takes care of your mental state.

The second profit target is about money, making sure you’re going to make money no matter what happens with the trade.

The final third is about seeing where the stock can go long term.

Wisr is a stock I would like to have held onto.

But unfortunately, it suffered a crushing retracement during the coronavirus crash, as you can see below:


Port Phillip Publishing

We ended up exiting Wisr when it hit our stop-loss.

Now, if we’d just bought and held over the same period, we would have sheepishly walked away with a 56% LOSS overall.

But the important thing to understand here is, because we’d taken two lots of profit already, we still exited this position with a 28% GAIN overall in four months.

Yes, even despite the stock crashing through the floor in March.

That’s what my risk management strategy is all about. Trading into a position so the worst that can happen is you break even or profit (before trading costs, of course).

Now, I want to reiterate just how this system can help you make more profitable trades, even during volatile markets.

Since I launched this system to private investors back in November 2018, we’ve made a total of 44 trades:

  • 19 wins
  • 10 losses
  • 15 breakeven trades

The high breakeven number is due to the crash. There were plenty of big winners that ended up being stopped out at breakeven.

That’s the power of having a strategy like this, especially now. You can survive a huge event like the coronavirus panic, and even come out on top.

Our average win since November 2018 is 56% and the average loss is 19%.

That means, on average, we make three times as much on the winners as we lose on the losers.

I can’t stress this enough…

If you want to make lots of money trading, it’s all about managing your risk in a disciplined way

That’s what I’m doing with my system.

You’ll notice that a lot of the charts I’ve shown you have a similar setup.

We see a trend developing, we find the range, we take advantage of it and take profits quickly. Then we let the remainder run.

I haven’t seen anything that’s quite like this approach in my whole career.

If you’d like to get involved, you’re going be learning something very new that a lot of traders just aren’t looking at.

Tomorrow, when I reveal how you can put this trading system to the test, that’s something you’ll need to think very carefully about.

See, as good as this system is at identifying risk early on in a trade, it’s still not 100% foolproof.

You will still lose from time to time.

The aim of this system is to make sure that if the market does turn against you, you don’t lose big.

That’s what leads to consistent gains when trading stocks

You now know almost everything about my trading system and how it works.

You’ve seen how it identifies tradeable ranges, and how it’s designed to find entry and exit points within each range before the price action breaks out.

And now you know how I manage your risk in each and every trade with this breakeven carry strategy.

Our next session is the big one.

Join me tomorrow, and you’ll get the chance to put this system to the test yourself.

I’m going to show you the result of every single trade I’ve recommended since we launched at the end of 2018, and actually walk you through some of them on camera.

I’ll show you the winners and losers.

You’ll see exactly where I recommended entry and exit points to my clients.

I’ll tell you what I instructed my readers to do at every stage in the trade, so you’ll see how all of that would have been explained to you.

Now, I hope to achieve two things.

First, I want you to see how simple this service is to use, and how I will look after you every step of the way while my recommended trades are live.

Second, I hope you’ll start to see the kind of advantage this system may be able to give you, especially in uncertain markets like we’re in now.

You’ll see how it could help you find entry and exit points with more confidence, and how it could help you manage your nerves and your stress level while your money is live in the market by limiting your downside risk.

To be quite honest, I’m not sure what else you would want out of a trading service, except perhaps the chance to try it out without any ongoing commitment.

Well, that’s exactly what’s going to happen in our fourth and final session tomorrow.

I’m really looking forward to that one and, if this is your thing or you think it could be, I’m going to organise something very special for you.

But it’s really important that you show up for this final presentation of the workshop.

This is only going to be available to people who show up for our last lesson.

Don’t worry — I’ll make sure you don’t forget. I’ll send you a reminder, plus another email when the link to our final session is live.

Please, do what you can to be online and be ready to act.

This is the real deal; I can’t wait to share it with you.

Thanks again for reading and I’ll see you at the final session tomorrow.

Cheers,

Murray Dawes Signature

Murray Dawes,
Host, The Magnetic Trader Workshop

If you missed, or would like to reread, any of my previous essays, you can find them below:


Murray Dawes is the Editor of Pivot Trader and contributing Editor at Money Morning. He was one of five, from 5,000 applicants, chosen for a graduate position with the Swiss Banking Corporation — now part of banking giant UBS. The bosses quickly cottoned on to his potential and pushed him up the ranks as a futures broker on the floors of the Sydney Futures Exchange. Murray later broke out on his own and developed custom trading systems to trade leveraged financial instruments like futures. Due to his success, Murray became the ‘hired gun’ trader for Australia’s rich and famous. Today, Murray runs a trading service through Fat Tail Investment Research to help everyday Aussie investors use his advanced trading methods.

Money Morning Australia