www.tradestops.com How to Lock in Profits on Every Trade - Presented by Dr. Richard M. Smith Learn the single most important reason that individual investors lose money. Learn the proven mathematical formula to make bigger and faster gains on every trade you make. Learn what trailing stops are and how they work. Learn how to make a plan for tracking your stocks to sell at just the right time. View case studies of this process in action and the amazing results.

1. How to Lock In Profits on Every Trade

2. Richard M. Smith, PhD
B.A. Mathematics
University of California at Berkeley
PhD Systems Science
Watson School of Engineering, SUNY Binghamton
Doctor of Uncertainty
Currently consulting for Pfizer, J&J, Stansberry
Research, Oxford Club, etc.
My Investment Career
• An inauspicious beginning
• The beginning of TradeStops.com

3. Presentation Objectives
• Show you the most important thing that
investors can do to improve their returns.
• Show you what trailing stops are and how
they work.
• Show you how TradeStops.com works.
• Preview new features in TradeStops 2.0.

4. Which do you prefer?
Bet #1
•A: 80% chance to win $4,000; or
•B: 100% chance to win $3,000

5. Which do you prefer?
Bet #2
•A: 80% chance to lose $4,000; or
•B: 100% chance to lose $3,000

6. Common Obstacles to
Success
i.e., why you might want to consider
something like trailing stops …

7. Those That Have Gone Before Us
The investor’s chief problem—and even his worst enemy—is likely to
be himself.
Benjamin Graham
There is one important caveat to the notion that we live in a new
economy, and that is human psychology… which appears essentially
immutable.
Alan Greenspan

8. Terrance Odean and Brad Barber
Haas School of Business, UC Berkeley
http://faculty.haas.berkeley.edu/odean/
Major academic studies on the behavior of
individual investors …

9. Hard Evidence from Barber and Odean
• According to a study of 88,000 investors,
“people are one and-a-half times more likely to
sell a winning stock than a losing stock, and the
losing stocks they do cling to under perform the
winners they sell by an average of 3.5%.”

10. Hard Evidence from Barber and Odean
• A study of 10,000 investors by the University of
California’s Graduate School of Management
similarly finds that the two most common
mistakes investors make is that they
“disproportionately hold onto their losing
investments and sell their winners too early.”

11. Hard Evidence from Barber and Odean
• In Nov. 2006, universities from around the world
jointly analyzed ALL trading activity on the
Taiwan Stock Exchange (TSE) and found that
investors are about “twice as likely to sell a stock
if they are holding that stock for a gain rather
than a loss.”

12. Barber & Odean (UCB) – Boys will be boys
Important Research Conclusions
• “Investors in our studies:
• Traded too actively;
• Were under-diversified;
• Clung to their losers; and
•Bought the stocks that happened to grab
their attention.”

13. Barber & Odean (UCB) – Boys will be boys
Important Research Conclusions (cont)
• Investors were motivated by:
•Overconfidence
•the desire to avoid regret,
•and the difficulty of evaluating
thousands of investment alternatives.

14. Positive Prospects (Gambles)
Prospect #1
• A: 80% chance to win $4,000
• B: 100% chance to win $3,000
Expected Value
• A: $3,200
• B: $3,000
Percentage of individuals that prefer:
• A: 20%
• B: 80%
For gains we want the bird in hand.

15. Negative Prospects (Gambles)
Prospect #2
• A: 80% chance to lose $4,000
• B: 100% chance to lose $3,000
Expected Value
• A: - $3,200
• B: - $3,000
Percentage of individuals that prefer:
• A: 92%
• B: 8%
For losses … we’ll keep two in the bush, thank you.

16. Prospect Value or Utility Function
• We’re more willing to let go of
the gains than we are to let go
of the losses.
• The gains aren’t as important to
us. In a strange way, we
actually prefer the losses.
• So, if we hold two stocks – one
a winner and the other a loser –
and we need to sell one, which
one are we going hold on to?
• The loser!
• We must reverse this pattern!

17. What it takes to get even after a big loss
Percent fall in share price Percent gain required to get back to
break even
10% 11%
20% 25%
50% 100%
75% 300%
90% 900%

18. The Power of Compounding Interest

19. Behavioral Finance and Cognitive Biases
• The Bandwagon Effect: It must be the right thing to do because
everyone else is doing it. Bubble trouble!
• Loss Aversion: Prefer avoiding losses more than making gains.
• Outcome Bias: Judging a decision by its outcome rather than the
quality of the decision at the time that it was made.
• Sunken Costs : Money that has already been spent is more
valuable than money that may be spent in the future. If I sell at a
loss, I’m wasting money. Not!
• Recency Bias: Weighting recent data more heavily than earlier
experiences.

20. Behavioral Finance and Cognitive Biases
• Anchoring: Rely too heavily on readily available information when
making a decision. CNBC anyone?
• Belief in the Law of Small Numbers: Making mountains out of
molehills.
• Endowment Effect: Valuing something more once we own it.
• Disconfirmation Bias: Critical of information which contradicts our
beliefs while uncritically accepting information that is in line with
them. Hear what we want to hear.
• Post Purchase Rationalization: If a decision needs to be
rationalized after the fact it is probably wrong!

21. Goldman Sachs 2Q09 Earnings

22. Houston, We’ve Got a Problem!
• We’re biased against selling our losers and holding our
winners.
• We have other cognitive biases as well.
• It’s difficult to recover from losses.
• Compounded interest is looking pretty darn good.
• Goldman Sachs is taking the other side of our trades.
• What’s the solution?!

23. Trailing Stops
The simplest and most intuitive method for
reversing the tendency to hold on to your
losers and sell your winners.

24. Trailing Stop Example – JDS Uniphase

25. Trailing Stop Example – JDS Uniphase

26. What is a Trailing Stop
• Set a stop-loss a fixed percentage below your initial
purchase price. If you bought at $100 and you are using
a 25% trailing stop then your stop starts at $75.
• Check each evening if the latest close is below your stop
or if a new high has been made.
• If your stop was penetrated then close the trade.
• If a new high was made then adjust the stop. If the new
high is $102 then the stop is 0.75 * $102 = $76.50.

27. Trailing Stops beat professional judgement

28. Why We Love Trailing Stops
• Sophisticated enough to do the trick of cutting
losses and maximizing gains.
• Simple enough to be understood by all
investors.
• Understanding gives confidence in heat of a
crisis.
• Used by world-class investors and traders.
• Failure to plan is a plan to fail. You’ve got to
have a plan!

29. TradeStops.com

30. Trailing Stops Only Service

31. Trailing Stops Only Service

32. TradeStops.com

33. TradeStops.com

34. Alerts can be organized into Portfolios

35. Email Alert Format

36. Trailing Stops Only Service

37. Trailing Stops Only Service

38. TradeStops Complete – Price Triggers

39. TradeStops Complete – Time Triggers

40. TradeStops Complete – MA & Volume Triggers

41. Benefits of TradeStops.com
• Tracks your trailing stops for you.
• Can track other alert types for you as well.
• Adjusts your alerts for dividends and splits.
• Covers US equities, Canadian equities, London equities,
US Mutual Funds, US indices, Foreign indices, Options.
• Alerts never expire – can be left open indefinitely.
• Stops are never visible to anyone even remotely
affiliated with the market makers.
• Great things to come …

42. What about my online
broker’s trailing stops?

43. Online Brokers – TD Ameritrade

44. Online Brokers – TD Ameritrade
Trade Triggers™
Trade Triggers are essentially a set of "if/then" rules you craft to instruct
TD Ameritrade to automatically enter an order in your account or
send you an email alert as soon as a specific market event occurs.

45. TradeStops vs. Online Brokers
• TradeStops lets you leave an alert active for as
long as you are an account holder. Online
brokers make you cancel them after 60 days.
• TradeStops adjusts alerts for dividends and
splits. Online brokers cancel alerts after
corporate actions.
• TradeStops will never execute an order for you.
• TradeStops is simple to use.

46. TradeStops 2.0

47. TradeStops 2.0 – Main Navigation

48. TradeStops 2.0 – Alerts Only

49. TradeStops 2.0 – Alerts by Position

50. TradeStops 2.0 – Positions Only

51. TradeStops 2.0 – Closed Positions

52. TradeStops 2.0 – Closed Positions

53. TradeStops 2.0 – Closed Positions

54. TradeStops 2.0 – Portfolio Overview

55. TradeStops 2.0 – Portfolio Charts

56. TradeStops 2.0 – Research Charts

57. TradeStops 2.0 – Position Size Calculator

58. TradeStops 2.0 – Event History

59. Conclusions …

60. How to Lock in Profits on Every Trade?
• Learn to cling to your winners!
• Use a tool like trailing stops to help you to avoid
the tendency to hold losers and sell winners.
• Staying in your winners is HUGE. Often it is
even more difficult to than cutting your losses.
• Have a plan (navigate “the dip”).
• Remember that YOU are part of the equation.
• Use a service like TradeStops.com!

61. Markets Have Risk – We aren’t the only ones!
I can calculate the motion of heavenly bodies but not the madness of
people.
Sir Isaac Newton
Our sector concentration is predicated on blackjack and investments.
Professional blackjack is being played in this trading room from the
standpoint of risk management, and that ultimately is a big part of our
success.
Bill Gross
The game of professional investing is intolerably boring and
overexacting to anyone who is entirely exempt from the gambling
instinct; whilst he who has it must pay to this propensity the appropriate
toll.
John Maynard Keynes

62. The Serious Self-Directed Investor