I decided to get rid of JADE, which doesn’t fit to my trading strategy. As I mentioned earlier, this purchase was a deviation from my rules. This is the reason why every investor or trader needs to remind his rules as long as he remembers them.
11/30/2009 15:36:47 Sold 34 JADE @ 3.0805
I also added 3 shares of RINO to the portfolio:
11/30/2009 09:30:16 Bought 3 RINO @ 33.49
Why I added only 3 shares? As the Reverse Scale Strategy dictates, you should add only the same amount of dollars to the position as your initial investment was. When I ran my portfolio loss control calculation I could add 15 shares of this stock, but RSS rule says not to do it. The reason is simple. If this new position turns against me and I will be stopped out, I will lose the second purchase, but the first purchase will make up the loss and I will end up equal. If however I would have purchased more than the first position, the second position loss would easily wipe out the first position gain and get me into a loss. For example:
My first purchase into RINO was $100 (per the loss control plan I could not spend more).
My second purchase into RINO was also $100. If this position turns against me and I will lose money, I will lose $28 on this purchase. But my first position is already making me $38, so I will end up with $18 gain. If I have purchased 15 shares instead, I would lose $150 on the second position and the whole trade would send me into -$112 loss.