Speculative Stock Trading

Summarizing on previous discussion in portfolio asset allocation, the maximum proportion of portfolio value percentage are 30% for small-cap stocks, 30% for mid-cap and large-cap stocks, and 100% for leveraged ETFs respectively. Due to account margin requirement, it may not be possible to achieve all maximum at the same time. Since it is expected that the majority of trading transactions will be on leveraged ETFs, its investment amount will be up to 100% of portfolio value. Mid-cap and large-cap stocks comes next in the investment since they can usually support a higher loan margin and more stable in price movement. Small-cap stocks lastly use up the remaining buying power of the portfolio. In order to maximize the use of available financial resources, the portfolio is fully invested for most of the time.

The trading and hedging strategy for stocks and ETFs are different. For stocks from small to large capitalization, the trading strategy is to purchase a stock when it appears undervalued. If the stock price drops further after purchase, then hold on if the portfolio can support the borrowing. If the stock price goes up after purchase, there are two possibilities. The simple approach is to liquidate the investment and switch to another stock. Alternatively, if the stock still have potential for appreciation, call option can be sold to realize some of the profits. Mid-cap stocks appear to be best match for this strategy as penny stocks have higher risk of falling precipitously and blue-chip stocks restrict the profit potential. The presence of stock equity in the portfolio provides certain diversification on the heavily weighted ETFs.

The major component of the portfolio is leveraged ETFs. The reasons are higher leveraging and liquidity. Such aggressive portfolio constitution can result in a catastrophe if the market moves unfavorably against the portfolio and for extended time may wipe out the entire portfolio. The experience during the financial crisis shows that over leveraging and extended exposure to portfolio depreciation can wipe out over 90% of the portfolio value within months of time. Therefore hedging strategy is a critical part of portfolio management.

For a fully invested trading account, there is usually no problem if the market movement is favorable to the portfolio. Otherwise, the depreciation in portfolio value may drop below account margin maintenance requirement. In this case, there are two possible solutions, injection of additional fund into the account or liquidation of assets in the account. Since there is no extra resources available, the latter is the only means. And the effectiveness of hedging strategy will be tested in an adverse market environment.

Current portfolio in the trading account is active and there is some loss since the start of the year, mostly in small-cap and penny stocks. This is the reason for the preference of mid-cap and large-cap stocks in portfolio asset allocation. In subsequent trading transactions, the discussed speculative stock trading strategy will be followed and the strategy details will be refined with the knowledge and experience gained in each successful or unsuccessful transaction.

Emphasizing again, previous experience during the financial crisis indicates the importance of risk control and portfolio preservation.