Ep. 296 Risk Management Rules: The Bad Habits Of Traders And How To Correct Them
Investing With IBD
Deep Dive
Why is it important to adjust trading rules based on market conditions?
Market conditions can change rapidly, and rigid rules may not adapt to sudden shifts. Adjusting rules allows traders to remain flexible, especially during volatile periods or when market trends shift, ensuring better risk management and performance.
What is the current market trend according to Scott Bennett?
The market is in a strong uptrend, with the S&P 500 rated at a 9 out of 10 on a strength scale. The NASDAQ is also in a short-term and long-term uptrend, signaling a 'gas signal' for potential buying opportunities.
What does Scott Bennett mean by 'gas signals' and 'break signals'?
Gas signals indicate a short-term and long-term uptrend, suggesting it's a good time to buy. Break signals, on the other hand, indicate a short-term and long-term downtrend, advising traders to sell or stay on the sidelines.
How does Scott Bennett use volatility-adjusted momentum (VOMO) in his trading strategy?
VOMO helps identify stocks with strong momentum relative to their volatility. By dividing the rate of return by the average true range, Bennett aims to find stocks that are performing well with less volatility, making them easier to hold and less risky.
What is the significance of the relative strength index (RSI) in Scott Bennett's strategy?
The RSI helps identify overbought conditions. Bennett uses a threshold of 68 to signal when a stock is potentially overheated, advising traders to pause buying or consider taking profits to avoid overextension.
What are some of the stocks Scott Bennett is currently watching?
Bennett is closely monitoring Intuitive Surgical (ISRG), Carvana (CVNA), and GE Vernova (GEV). These stocks are showing strong fundamentals, institutional buying, and favorable trends, making them potential candidates for investment.
How does Scott Bennett manage risk in his trading strategy?
Bennett uses a combination of trailing stop losses and position sizing. He aims to risk no more than 5% on initial positions and adjusts stops to capture 60% of gains once a position is up 24%, ensuring he doesn't give back significant profits.
What is the 'road tripper' concept in Scott Bennett's strategy?
The road tripper concept involves setting a risk unit (e.g., 8% of capital) for each trade. Once a position gains three times the risk unit (24%), the trailing stop is tightened to lock in 60% of the gains, allowing the rest to run while managing risk.
Why does Scott Bennett emphasize following institutional buying?
Institutional investors, like hedge funds, drive significant demand for stocks, often pushing prices higher. By tracking their buying activity, Bennett aims to identify strong stocks that are likely to continue performing well due to this institutional support.
What is the significance of the 13F reports in Scott Bennett's strategy?
13F reports provide insights into institutional holdings, but they are delayed by 45 days. Bennett uses a proprietary system with a 30-day lag to get earlier insights into institutional buying trends, giving him a slight edge in identifying potential investments.
- Adaptable investment rules are crucial for navigating market volatility.
- Short-term and long-term signals provide a balanced approach.
- Position sizing strategies manage risk and maximize gains.
- Risk tolerance is paramount in investment decisions.
Shownotes Transcript