Trading the R’s

Learn How To Mitigate Risk.

Thanks so much for reading this article! How valuable and relevant the following information is, especially as it relates to trading.

Every website, stock column, company or ‘trading guru’ will tell you how important risk mitigation is. Consider me to be neither of these four. I am just a guy who loves education and one day decided to combine that love with my zeal for finances, investing and of course the stock market.

First, to define ‘R trading’ – This is a concept that has been around for a few years. It is an incredibly simple formula [that almost NO other company will teach you] and I am going to do my best to break it down very quickly. The reason I am creating such a succinct article about R trading is because you will hear me use this term ALL the time in videos, emails and in our day trading and swing trading rooms.

An ‘R’ simply stands for Risk Unit.

Many people have an intense and visceral connection to money. It is extremely hard to break this relationship because money can buy us things. That is about all it can do. Money is just a tool. Are you in love with the hammer in your garage? Do you treasure it, think about it, and constantly try to get more hammers? Money is simply a tool, which can be used to literally build and grow more wealth and security. Therefore, you can either use your hammer or stand in awe of its illusiveness.

In trading there are two facts:

#1 You will lose money on trades

#2 You will be wrong on trades

If you have been battling with this issue for years and constantly find yourself trading out of deficits, blowing out your accounts, and you are always ‘broke’. It is much longer and goes more in-depth into this psychology.

For now, I am just going to explain R trading and I am going to do it for free.

R = Risk Unit.

Instead of risking money, or trading money, you are breaking that emotional barrier by giving it a less cool name. It is no longer money that you are trading, just risk units. Boring, plain old risk units.

Your goal? Risk small, win big. Lose small, win big. Cut your losers and let your winners run. Risk less than your potential reward. You know, all those nomenclatures. Here is how to calculate it.

The R you trade should be approximately 2% of your entire account. It can certainly be less. It can be 1% or .5% or .25. You get to determine and pick the risk percentage. Usually (especially for newer traders) the smaller the better when starting.

If you have a $5,000 account, your R = $100.00   100 = 2% of 5,000. 

If you have a $9,504 account, your R = $190.08 (You could round up to $200 or round down to $190 if you wanted to).

If you have a $103,716 account, your R = $2,074.32. (Again, you could round to $2,075, $2,100, $2,050, but somewhere in that general range).

Your first question is, ‘Jerremy, if I have a $5,000 account, you are saying I can only spend $100.00 per trade?

Nope. That is not what I am saying.

I am simply stating that $100.00 is the amount you should be willing to lose on the trade. That is your Risk Unit, or your R. The amount of investment, or your ‘position size’, is not as important as most people make it out to be. In my opinion, the more important factor is the potential risk on each trade (i.e. how much you lose if you are wrong). Warren Buffett’s famous quote, “The #1 rule in trading, don’t lose money”.

Your goal is obviously to lose as little as possible. Risk mitigation and defense is your concern and focus. If you prevent yourself from destroying your account, you can trade longer. After all, if does require money to trade! (I know. I have been called Captain Obvious before.)

How to calculate with shares

R / stop value = number of shares to trade

A trader wants to enter AAPL and they plan to buy shares as it bounces off $120 as a support price. They look at the chart and determine $118 to be a good price for a stop. The stop value in this scenario is $2.00, which is the difference between the entry price and the stop location.

Let us say the above trader has an R of $100.00

R = $100 / $2.00 stop value = 50 shares to trade. The investment would be $120 x 50 shares, or $6,000.00. The risk, however, if that trader is wrong, is only a $100.00 loss.

Same trader. Different stock.

A trader wants to enter FB and they plan to buy shares as it bounces off $81 as a support price. They look at the chart and determine $80 to be a good price for a stop. The stop value in this scenario is $1.00.

R = $100 / $1.00 stop value = 100 shares to trade. The investment would be $81 x 100 shares, or $8,100.00. The risk, however, if that trader is wrong, is only a $100.00 loss.

Two different stocks, same loss potential. Therefore, if FB goes up and AAPL stops the trader out for a loss, the trader can be right only 50% of the time and still make a profit. If FB bounces from $81 and goes up to $90 and makes 9R on this trade, while only 1R is lost on the AAPL trade, that is a total of 8R gained. This trader created a plan, followed it, mitigated losses, and made a profit. Boom. That is smart!

How to calculate when buying call or put options

R / stop value = number of shares to trade. Then convert that into option contracts.

Many analysts and companies make this more complicated than it needs to be. I will say simply, if you need a rough, quick, down, and dirty way to calculate risk on an option trade, this formula works. It is at least close enough. The reason I say that is because options can change and fluctuate in price regardless of what the stock does. Therefore, it is nearly impossible to get this formula exact unless you use purely the option price (which you do not really want to do either), but I will show you how.

A trader wants to enter AAPL and they plan to buy shares as it bounces off $120 as a support price. They look at the chart and determine $118 to be a good price for a stop. The stop value in this scenario is $2.00, which is the difference between the entry price and the stop location.

Let us say the above trader has an R of $1000.00

R = $1000 / $2.00 stop value = 500 shares to trade. How many contracts control 500 shares? Answer = 5 contracts. Each contract controls 100 shares. Therefore, if a trader bought 5 contracts and had an R of $1,000, this math would give a close approximation of future loss.

Same trader. Different stock.

A trader wants to enter FB and they plan to buy shares as it bounces off $81.58 as a support price. They look at the chart and determine $79.54 to be a good price for a stop. The stop value in this scenario is $2.04.

R = $1000 / $2.04 stop value = 490 shares to trade. How many contracts control 490 shares? Answer = 4 contracts. Each contract controls 100 shares. What about the other 90? This is where discretion comes in. A trader could easily understand if four contracts were bought, the loss would likely be less than $1,000. If five contracts were bought, the loss could still be slightly less than $1,000, at $1,000 but likely a tad more than $1,000.

Two different stocks, same loss potential. Therefore, if FB goes up and AAPL stops the trader out for a loss, the trader can be right only 50% of the time and still make a profit. If FB bounces from $81.58 and goes up to $90, the trader gains some R’s and loses only 1R on AAPL. Great risk mitigation!

Again, simplistically, a trader could buy 10 option contracts, which cost $2.40 each. An investment of $2,400.00. If the trader has a $50 R, the stop on the actual option price itself could be $2.35. However, that could easily be the bid / ask to spread on the option. Option trading is a tad more advanced and I am happy to teach you (for free). Click here for that class. 

Thank you so much for reading this information! Understanding risk mitigation is always the key in trading. The longer you protect your money, the longer you will have money to trade. Create a trading plan, follow it, mitigate risk and of course, Love life, Live life, and Trade it! 

Uber Doesn’t Just Share Rides, They Share the Future

Do me a favor, type “Uber” into a google. 10 years ago the first search that appeared would be “denoting an outstanding or supreme example of a particular kind of person or thing.” It wouldn’t be pompous of you to remember that Uber once was only used in sentences as an adjective to describe an exaggeration. Now, your search is flooded with hits pertaining to the company, and probably the logo. If you glance closer you’ll notice something more ironic, Uber’s search results are Uber disdain.

The Bad

“Uber, Lyft ‘essentially ignore US labor laws’: employment expert” – Yahoo Finance

“Uber Lays Off 3,500 Employees Over A Zoom Call—The Way In Which A Company Downsizes Its Staff Says A Lot About The Organization” – Forbes

“Uber offer for Grubhub fans worries over delivery fees charged to restaurants” – Reuters

“Uber’s Grubhub Play: A Desperate Bid To Save A Business Everyone Hates” – Forbes

With results like these, you have a better chance of catching an Uber in farmland USA than Uber does catching a break. Firing employees only to turn around and buy a company is tough to side with. Unfortunately, there financials don’t resonate with the optimism you’d hope for in a long-term investment either.

The Ugly

“Uber Says Covid-19 Has Made It Impossible to Predict Financial Results” – Barron’s

I know, for an article about how Uber can shape the future this is a grim way to start. Super heros are admired for their powers, but are taken down from their weaknesses. In order to configure a future of Uber’s capabilities we have to remain cognizant of its limits, specifically press and financials. Nevertheless, even with uberly negative press and financials that would make you turn away, Uber’s growth is undeniable and their presence is unquestionable. The only question we now have is how can a company with amazing growth, bad press (currently) and horrific financials create an impact beyond sharing rides and delivering meals?

The Good

Coronavirus has decimated industries, companies, and families. Cures are discussed nonstop as our only saving grace. Testing is demanded, but the execution and delivery of these kits falls short. Uber can take a stab at helping develop testing and materials, but the bread and butter doesn’t come with innovation, rather with delivering this innovation. A time when people aren’t leaving their homes, and seeking ways to get tested Uber has the capability to bridge that gap of providing the means to deliver tests to you all while you don’t have to risk going outside if you don’t want to. Ride shares numbers are clearly down, but that by no means signals that ride sharing at the moment can’t turn into test kit transportation. Fees can be associated, and while this most likely will garner more bad PR, it is better to pay and be safe than cheap out and be sorry.

Uber’s second opportunity to squash some of its bad PR and increase growth lies not as much on keeping cars on the street, but more so in the shop. Specifically, their shop. A company which has improved customer service in the transportation industry can do so in its neighboring industry: car repair. The same method in which you use an app to hail a ride, you can do so to hail a mechanic to service your vehicle. Flat tire and need help? Uber Towing. Oil Change? Oil Body Shop. Utilizing the same tech that tailors a customer’s experience in their ride sharing, you can tailor a repair experience. Simple windshield fluid addition can be just a click away, while more heavy duty repair can be selected in the app where Uber partners with body shop’s in the area to provide you with the closest recommendation to provide the repair you need. Uber isn’t simply a ride sharing service, it has the capability to transform the entire auto industry service from transportation to repair and even the car buying process. Ride sharing isn’t just the bread and butter, it’s also the entry point for Uber to change customer service and the details of the auto world.

Long-term

Uber has capitalized on two things so far: connecting you to the place you want to be, and connecting you to your food (and on some days to cats and dogs), well at least it appears that way. The connection though isn’t directly on Uber. Cars don’t have Uber models, streets aren’t owned by the company, drivers are considered independent contractors, and food comes from the kitchen of the restaurant, not Uber. Simply put, Uber is the connection. When you see beyond the looking glass you notice Uber is the booking agency. They pair you with a driver and restaurant that are seeking to provide a service. What if this same simple process of tapping a screen to get a ride could be reused in other methods? Why have to go through the plethora of hotel booking sites when you can do it on an app.?Why have to determine which airline has the cheapest flights when you can do it on the same app? Why worry about where to place your bags when the same app that has booked your flight and given you a discount can do it for you?

People hate a plethora of things, two that are prevalent are waiting in line, and having to be patient. We will pay obscene amounts of money for someone to handle the tedious tasks of traveling, moving, finding information and much much more. So why not automate that in one place? Imagine opening Uber and being asked “What are you looking for today?” A flight can be booked and boarded all with typing “flight.” Type in “Movers” and you’ll have rates ready for the address you’re going to. “Train” can get you tickets, seats, and beverages saved before you even leave your house. We want simplicity in our lives first and foremost, and if you can get it to us easily with great service, then please have my money.

The technology they currently use within their app simply connects people to cars, or people to restaurants. They would have to go through the loops of obtaining the information from a plethora of sources, but if they can then you have the possibility of an app hosting “bookings” to any gig or tedious task you want. It’s not out of this realm to believe that when you want to take a flight, you can open the uber app, select a flight, pay for bags, book an Uber to the airport and then book an Uber to the hotel when the flight has landed. Earlier I mentioned car maintenance, it’s the same idea, just typing “flat tire” or “Oil change” can get you the nearest repair shops to get this done, just like by typing in the address you want right now gets you connected to someone who will take you there.

By focusing on being the connection between people and what they are currently looking for, Uber has the chance to spread its reach to anywhere people are looking to optimize the capability of finding help. This can also come at one of the worst times ever for the gig economy. When gig jobs are being slammed to the ground due to Virus concerns there will come a time, whether it be during or after the virus, that people will need to call someone to fix their toilet, repair their car, or remodel their home. Right now a lot of those people are either a) about to go out of business or b) rethinking their marketing since they aren’t being called right now. Out of this economic storm for the gig economy will come a rise and with Uber’s ability to connect people, they can spread their wings in the blue collar workforce to help get those gig economy workers get back on their feet, refocus their business, and provide them a place to get connected to people faster than they have before.

The future in Uber is still uncertain, since nobody does have a crystal ball. The present seems far from optimistic and positive for one of the fastest growing companies out there. Nevertheless, as long as Uber can survive from the bad PR (which they will), and make strides in their financials, Uber can come out of this Virus and this current recession/depression (as mentioned from all the “experts”) with a model to not only connect people to addresses but to connect people to their daily needs.

Credit to Aleks Gleyzer for helping with this post.

Thanks for reading,

Jerremy Newsome

www.reallifetrading.com

www.jerremynewsome.com

How to Invest in Stocks?

Well, hello there! First off, rest assured, this is not a ‘sales e-book’, or anything leading you to a sales page. I’m not after your money. I want to educate, entertain, and enrich. I want to teach YOU what the stock market is. I will say at the forefront this information below is incredible, but it does apply mainly to my readers in the United States of America. Other countries have different laws, regulations, and various retirement programs. I know some people who can help you out if you live in Canada. At the end is my contact information. Regardless, thank you for opening and reading this article. You rock!

MY guess is you’re between the ages of 10 and 36, and you have very little, or no idea what an IRA is, how to create one, fund one, find one, open one, trade in one, or how finances really work. HEY, that’s totally fine! The current education system in the U.S. likely didn’t teach you any relevant, Real Life information when you were in high school or college, although I’m sure you crammed for tests and memorized tons of more or less meaningless facts and equations just so you could pass. IRA?

An IRA stands for Individual Retirement Account. It is set up through a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. There are three main types of IRAs: Traditional, Roth, and Rollover, each with different advantages. 401K?

401K Is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.?

What’s the main difference? Well, truthfully, not much. You can trade through an IRA much easier and you don’t have to be employed to have one. Most good companies offer a 401k, but it’s through them so their rules apply.

You see most 401Ks and IRAs are all tied to the stock market in some form or fashion. Therefore, let me define two more terms for you. The stock market is an everyday term we use to talk about a place where stocks and bonds are traded, meaning bought and sold. For many people, that is the first thing that comes to mind regarding the term – investing.

A stock purchase is literally buying a small ownership in a company. The word stock is also synonymous with the words share and equity.

Take Wal-Mart for example. It is publicly traded, which means it is traded openly on the stock market. That means people can literally buy ownership of Wal-Mart. Therefore, if you bought one share of Wal-Mart and you spent $70 per share, with that one share you would, quite frankly, own .000001% of Wal-Mart! How cool is that? Now, the question begs, why would anyone do that?

WMT
The simple answer is to make money. As an example, let’s say Tammy saves up $700 a year and buys 10 shares of Wal-Mart every year for 20 years. That’s $14,000.00 of total monies saved and deposited. Without getting deep on you. let’s say, bottom of the barrel, you make 2% interest on your $700 annual investment. After 20 years you would have $17,196.48. Not too shabby, huh? That’s what ‘investment’ really means: having your money work for you. Ya know, make money while you sleep, work smarter not harder, all that jazz. It’s not scummy or illegal, weird, or odd. It’s just the way the world turns. Have you ever wondered how Warren Buffet, Donald Trump and others become so wealthy? They invest, they save, and they prepare! They make their money work for them.

Okay, you’ve got the idea of what a stock is now. There are countless companies to choose from. Here’s what I like about IRAs. You can easily set up an IRA online. They are free to start and require about 10 minutes of your time. It’s almost exactly like opening up a bank account. What type of IRA should you open? In my non-licensed, regular down to earth, real life dude opinion, if you are under the age of 36 you should open up a ROTH IRA. That way, the money you deposit is after taxes.
Slow down. What the heck does that mean? A ROTH IRA is set up through a financial institution that allows an individual to save for retirement with tax-free growth. You deposit after tax money and when you withdraw the money after you retire, it is tax free! This is important because you’ll be paying a lot more in taxes when you’re older than what you pay right now. (At least, I hope so). Each year an individual can deposit $5,000 into a ROTH IRA. My 20-year olds reading this, I know that sounds like a lot of money now, but it isn’t. Do everything in your power to save $5,000 a year and put it into a ROTH IRA. Bake sales, car washes, selling furniture you don’t need or use, overtime on Saturdays, I don’t care what you do, just do something! Lock it up!

Because once you do that, you can begin taking part in what I call the “It’s so easy a cave man with Internet access and a computer can do it” plan. Ready? AAPL
Consider simply buying shares of Apple Inc., $5,000 worth a year, every year. Below is a stock chart of AAPL. Why AAPL?

I have 6 solid reasons to choose AAPL

  1. AAPL is everywhere. Look around you. Do you see any AAPL products? You probably do. Either your iPhone, your MAC book, iPad, AAPL TV, or iPod. I can’t vividly recall walking into someone’s house and not seeing at least one AAPL product somewhere, on TV or in movies
  2. They are a great company. Maybe this is slightly an opinion, but I doubt I will have tons of people disagreeing with me
  3. They have cash, a lot of cash. Cash is king. I’m sure you’ve heard the term. To date, AAPL has well over 40 Billion in free cash flow. You don’t have to be a money wizard to know that’s a lot of money
  4. AAPL is one of the most popular stocks on the market and have been for a long time.
  5. In 2014 they had a 1:7 split. What this means is a year or so ago, AAPL was trading around $700. After the split, each share was only $100. This makes
  6. AAPL more affordable AAPL pays dividends. Whoa, what is that word??

A dividend is “a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).”
What this means, ladies and gentleman, is when you buy $5,000 worth of shares in AAPL, the actual company, Apple Inc., receives $5,000 of monies to do whatever the company wants to do with it. As a big “thank you for your money”, Apple Inc. will give you a small amount of money back every three or four months. It’s called a dividend. And a good percentage in the stock market is 2-4% annually. Boom. Done. Simple.
Oh – one other cool tidbit of information. In the stock market if you own shares of certain companies you can rent them out! Just like if you own two houses and you only live in one of them, what would you do with the other home? Probably rent it out, right? You can do the same thing in the stock market. It’s called covered calls! More on that later. Upon doing that strategy, that 2-4% annually can look a little more like 10-12% annually. Hey, now we are talking!

Let me throw this one at you. $5,000 invested every year, for 20 years, with an interest rate of 10% annually, comes to $316,403.68. You will have contributed $100k. You will have earned $216,403.68 in growth. “Well, well, well Clarence, I think we have a winner.” **Said in a very thick British accent. *

That’s how money can work for you, friends, and 10-12% is just the 30-year stock market average. Over enough time, the average investor can expect to see this kind of return. In the future, I hope to teach you how 10-12% becomes your monthly expectation rather than your yearly, but more on that later too…

Alright. Thus far I think I’ve summed things up pretty well. Let’s wrap this up with:

  • Right now, you’re looking at 4 simple steps to begin to fund your retirement. And from a non-licensed professional, let me give you those 4 simple steps.
  • Step one: Create a 401K through your employer, or a ROTH IRA outside of your employer, or both. Charles Schwab is a great broker and you can fund a ROTH IRA through them. They make it super simple and, in the future, extremely easy to trade through, if you decide you want to. There are truly, hundreds of companies you can create an IRA with. Schwab is just one of the many. 
  • Step two: Start saving money. Put 10% of every paycheck into a savings account or you can set it up so 10% of your paycheck goes directly into your 401K or ROTH IRA.
  • Step three: Leave your 401K alone. Most are hard to trade through, some are not, but a 401K is definitely more complex than a ROTH IRA. To make this wildly simple, the money you put into your 401K is invested in the stock market through something called funds. These funds can be directly invested into the company you work for and then your company can reinvest your money however they choose to, or your money can be invested into mutual funds. A mutual fund is like a basket of companies. You have company A, B, C, D, E, F, G and BOND AX, BX, CX, DX and they are all grouped together. Their performance is averaged and the return on your money is the average return of the collective basket of investments.
  • Step four: Buy shares through your ROTH IRA of a company you love and interact with every day. There are literally thousands of stocks you could choose from. Don’t let all of those opportunities cloud you. How many cars can you drive at any given time? How many restaurants can you eat at any given time? The answer is one. Less is more in trading. If you want to learn to beef up your investing and trading skills, hey, I teach the world how to do it for free. Right here = https://www.reallifetrading.com/beginner-trading-course-new

Until next time friends, Love life, live life, and trade it!

Jerremy Alexander Newsome
Email: jerremy@reallifetrading.com
Happy to serve as CEO of reallifetrading.com





Is it worth investing in a 401k?

I’m glad you are here, and I’m thrilled you are asking this question. 

The answer is almost always, yes. Especially if your company provides and offers a match. What I find most helpful and useful on 401k’s is that the money comes right out of your paycheck before the money goes into your bank account.

Therefore, you don’t get tempted to spend it!

When I worked at Nationwide Insurance, they matched up to 6% of my funding. I funded a full 6% of each paycheck. Therefore, I was saving 12% of everything I made! Which was about $168 every 2 weeks. 

That’s about $336 a month. From age 18-20 and with some paychecks juiced up with sprinkles of overtime ~ my 401k was sitting at around $9,000!! In just two years! Simple savings. 

From there, I learned how to do a self-directed 401k, where I was able to invest and trade individual names and companies. The first company I bought shares of through my self-directed 401k was ticker: AG with First Majestic Silver. I bought 900 shares back on November 15th, 2010 when I was 20 years old. 900 shares at $10 per share cost $9,000. 

Just weeks later I sold them for $12.50 a share! That’s a $2.50 per share gain of 900 shares, equating to $2,250 gain in just a couple of weeks. Which was more than my normal bi-weekly paycheck was!!

This was a huge revelation for me! But it would never have occurred if I had not originally invested into my 401k! It’s an amazing first step toward growth, progress and financial understanding. 

Being able to know, see and comprehend what is inside of your 401k and what exactly you might be invested in – knowingly or unknowingly is something I can help with, if you want. Just email me! jerremynewsome@gmail.com

Excited to see your growth from here my friend! Thank you for reading!