- Price alerts and online watchlists can remove the emotion of holding a large portfolio of tiny positions
- Set price limits to monitor your watchlists
One reader question I received this week was on position sizing. The reader had more than 40 positions and wondered if it was too many. It is impossible for me to answer this because the answer is entirely dependent on your trading account goals and risk profile. The reader mentioned that they had many smaller positions in their account purely to keep an eye on them. This makes sense on one hand because it’s natural that people want to keep a close eye on stocks in their watchlist, and once you own a stock you are emotionally invested.
However, this can lead to a long tail of tiny positions that are eating into the cash position and maybe even providing a performance drag on the portfolio. If we say that 5 per cent on the account is held in these ‘watchlist’ stocks, then it’s not unreasonable to expect 20 per cent volatility. Especially if those watchlist stocks are speculative in nature. This scenario would mean that one percentage point can be gained or lost on these watchlist stocks. In a world where every basis point matters, the potential loss of compounding can mean a huge opportunity cost for readers who use their trading accounts and portfolios to “keep a closer eye” on potential positions.
It's far better to keep a higher cash position and instead outsource the monitoring of these positions with specialist software or even a humble notepad. I use price alerts, online watchlists and filters to track and monitor stocks.
As well as the potential for unintended gains and losses, these small positions can also affect us emotionally. If you’re like me and prefer to average up into positions, seeing red on the screen can be demoralising. I like to know that I am backing the stocks that are doing the heavy lifting of driving the numbers in my account higher rather than those that are damp squibs.
If you’re someone who likes to average down into positions (I am not saying that this is wrong, only that I don’t do it) then keeping a set of starter positions in your account to keep a closer eye on may be a good idea. But if you do decide to kill the position at a loss – then it’s a real loss. Unlike the deleting of a stock on a watchlist or the crossing out on a notepad holding positions in your account is live capital.
With regards to the number of positions, the true answer is the number you feel comfortable with. Smaller accounts can concentrate with great effect, but as they get larger it’s only natural that people may wish to diversify and decrease the risk. Put your money in your best ideas, but not so much that a 100 per cent loss is enough to knock you out of the game.
Picks and shovels play on construction
One stock that is on my electronic watchlist to watch closely is Accsys Technologies (AXS). This is a chemical technology company that offers modified wood products for civil engineering projects. The company offers Accoya wood (registered trademark) across 50 countries and has built a new factory in Hull to ramp up production. Accsys is also expanding its Arnhem plant and has a joint venture (JV) with a company in the US to open up the North American market. It has stated that its goal is to “increase production capacity by five times by 2025”.
The company is cash-generative and if you use adjusted figures has swung back into profit. More importantly for trading purposes, the chart is looking better. For those that are looking for a picks-and-shovels play on construction and civil engineering, Accsys with its market-leading modified wood products could offer that trade.
In Chart 1, we can see that the stock struggled to achieve any traction between 2011 and mid-2019. At the close of 2018, shareholders may have been beginning to believe their time had come as the stock broke out into multi-year highs, but by the summer of 2019 this excitement had been doused out. Chart 1 shows the dangers of buying into stocks that are in what I call ‘the land of nowhere’ – stocks that are trending sideways and are nowhere near major support or resistance levels that might offer an entry to trade from in the stock.
By contrast, in Chart 2, we can see significant breakout marked price action zones that acted as a magnet for the price. I’ve marked arrows on the charts where the price tangled with this line several times as resistance became support and then became resistance again. The price broke out decisively in December last year and is now consolidating in a range having traded nicely higher. I’ve marked the recent closing high at 163.5p (I use closing highs for breakouts and not intraday levels) and have an alert at 160p, so I’ll be triggered that the price is moving up before the stock actually breaks out. Using alerts to keep track of stocks in this way is a great way of outsourcing and it decreases the mental load of having to remember various stocks and differing levels.
Accsys Technologies may need a while to catch its breath, but for now I suggest putting the stock on your watchlist – a watchlist that isn’t in your trading account.
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