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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Free Trade Stock Investment Strategy

InvestorEducation / Learning to Invest Nov 18, 2014 - 06:00 PM GMT

By: Money_Morning

InvestorEducation

A big grin lit up my face when I opened my trading screens recently.

I was looking at the chart for Ekso Bionics Holdings Inc. (OTCBB: EKSO). The company was trading at right around $1.81 per share at midday on Monday.

That means it was close to a double from where I initially recommended it as our first human augmentation target to members of my Total Wealth research service.


Ekso is still a great buy, which is why I'm recommending it for Money Morning, too. There's plenty of room for this company to double – again.

But… What really got me smiling on that day was the juicy opportunity to use my absolute favorite trading tactic…

It's Called the "Free Trade"

The "free trade" is one of the single most important tactics any investor can use to build wealth securely and with maximum efficiency – especially when you use it in conjunction with "lowball orders" and "ultimate trailing stops" we've covered in Total Wealth.

What's really interesting, though, is not just the profit potential inherent in the tactic. There's also a risk management component that can help you take all of the risk associated with a given investment off the table.

Here's how a free trade works.

Let's say you bought 100 shares of EKSO at $1.00, and that you now see it closing in on a double once it hits $2.00. If you're like most people, your "greed gland" is in high gear. Under the circumstances, many investors find themselves thinking…

"Well if it doubled, then it could triple. And if it triples then it could…"

And they're right – it could. What they don't realize, though, is that with every "uptick," the risk of losing those gains grows far faster than the probability of achieving further gains.

If you've ever been to Las Vegas or Monte Carlo, this should strike a chord.

The big casinos know that the longer you leave your money on the table, the higher the chances that you'll lose it. So they ply you with free drinks, great music, and fun conversation – anything to keep you there.

That's why harvesting your winners fast and efficiently makes tremendous sense – whether you are gambling or investing.

The best way to do that is to sell one-half of your position in any investment whenever it doubles and keep the remaining half open.

Pros call this a free trade, because you not only get back your original investment, but you maintain all the upside you can handle, essentially "for free." Even better, because you've now "paid" for your investment, you can stay in the game with not an additional dollar at risk, even if the stock has a sudden reversal in fortune and goes from hero to, quite literally, zero.

A free trade works in all market conditions, on any investment, and can be set up well in advance. That means you don't have to be planted by your computer nor be an aggressive day-trader to make it work.

No other technique I know of comes close in terms of simplicity or effectiveness.

They're Easy (and Quick) to Set with Your Broker, Too

The Power of Free Trades

There are many benefits to free trades, and they're pretty straightforward:

They help you capture major winners.

They pay for their initial investment.

They help grow capital faster.

They control risk.

They inject automatic discipline while removing emotion.

The best part about free trades, though, is that you know exactly what price is required to book your gains in advance. That means you can set up a free trade the moment you buy a stock you're interested in, or any investment for that matter. There's no emotion, no hemming and hawing, and you don't have to wait by your computer screen.

You simply call your broker or get on your favorite online platform ahead of time and enter a "sell limit order" that will kick into effect when your stock trades at a certain price or better. For our purposes, that's when it hits a double.

If you purchased 100 shares of EKSO at $1.00 for example, your limit order would read something like the following:

"Sell 50 shares of EKSO at limit $2 or better GTC – all or none"

In plain English, that means that your broker knows to keep your order on his books to sell all 50 shares for $2 or more until you cancel it.

While limit orders are not guaranteed to be executed because they specify price (as opposed to market orders which simply trigger when a price per share is reached), they can be structured to meet very specific conditions like the ones we're talking about.

Limit orders really come into their own with smaller, low volume stocks and under high volatility when others are having their orders picked off by professional traders whose job it is to separate you from your money.

It's worth noting that limit orders can be used to buy or sell securities, too, even though we're just talking about them in context of creating "free trades" today. If there's a drawback to limit orders, it's a small one; namely, that the price of a given investment many never reach the price point you've set. Or, it may fluctuate above the limit price for such a brief point in time that your broker could not execute your order. In that case your order simply goes unfilled at which point you can cancel it or simply adjust the order to reflect conditions in effect at the time.

Some people don't like limit orders because they can cost more than market orders in terms of the commissions you pay. I think that's splitting hairs considering the protection of not buying or selling for more or less than you intended.

Don't Overthink It

Many investors have trouble with this concept.

With Ekso, my price projections for the stock are over $21/share. So it may seem uncomfortable or downright stupid to take profits at only $2/share when there's potentially so much more upside ahead.

I hear ya.

But that's a mistake I don't want you to make – like millions of investors will.

When properly done, the free trade is not about reducing potential at all. That's because you can then take the money you've pulled out of a free trade and immediately lateral it into another opportunity while letting the rest ride.

Imagine how fast your money will grow if you do this once, twice, three times or more and how fast your capital can grow – all from a single move made at the right time.

Successful investors set profit targets in advance because they expect to win.

They know (like we do) that you never go broke taking profits. They also know – most of the time from personal experience and the school of hard knocks – that big winners can turn into monster losers if you don't periodically take your money off the table. Usually that comes from pressing your luck when you shouldn't.

I don't ever want you to be in that position.

If today is your first exposure to the free trade concept, chances are good you'll be kicking yourself in the butt right about now because your mind is probably wandering to all the great trades that "got away" over the years. Don't be too harsh on yourself – we've all been there.

The important thing to do now that you know about the free trade is to use it every chance you get and with every investment you have.

You'll be better off for it.

Source : http://moneymorning.com/2014/11/17/how-well-play-the-2014-year-end-rally/

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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