At Zeal the primary goal underlying all of our research efforts is to uncover promising speculation and investment opportunities.  After we find these opportunities, we wait until the technical conditions in their sectors look favorable and then we buy them ourselves and recommend them as trades.  These new trades are found on Page 7 of Zeal Intelligence (ZI) or Page 1 of Zeal Speculator (ZS).  Samples of these pages appear below, and you can click on either to link to a full-sized copy.  This web page is designed to help our new subscribers understand how our trading recommendations work in execution as well as our risk-management techniques.

“They say you never grow poor taking profits.  No, you don’t.  But neither do you grow rich…” - Jessie Livermore, Reminiscences

New Trades  Our trades are organized in the order in which they were originally launched.  So if you look at ZI or ZS, you will see the oldest trades at the top of a section and the newest trades at the bottom.  In order to see if there are any new trades in a ZI or ZS, just look at the end of the trading lists.  Any trade that has the same date as the particular ZI or ZS you are reading is a brand new trade.  Each trade is tracked continuously from its originating newsletter over its entire life.  So if a trade is launched in the January ZI and closed in the July ZI, this trade will be tracked in those two newsletters as well as every newsletter in between.

Open Trades  A common question new subscribers ask is whether they should still buy a particular trade that may have been launched months ago.  The general answer to this is probably not.  We only tend to launch trades when technicals for their sector look highly favorable.  If a trade was launched more than a month ago, odds are its underlying technicals have changed and the probabilities may no longer be as favorable for it as they were near the launch date.  New subscribers are best off waiting for brand new trades so they know the trades' timing is sound.  It is best to only trade when probabilities are wildly in your favor, when we launch new trades.

Closing Trades  If a trade has "FINAL" at the end, we are closing it out for a realized gain or loss so this trade is finished and will no longer be tracked in future newsletters.  Trades can be closed via outright sales or by retreating into their specific stop-loss levels.

Tracking Open Trades  While ZI and ZS use slightly different formats for tracking trading recommendations, the basic core information contained in each is identical.  Here are ZI and ZS sample recommendations with all of their components labeled.  The ZI trade is on the top and the ZS trade is on the bottom.  The ZS format is a condensed version of the ZI format designed to fit in less space.

Thus the general format for a Zeal trading recommendation is the following...

(Recommendation Date @ Closing Price That Day * Current Price * Current Gain/Loss * Stop Price Level and Trailing Stop Percentage)

The initial part of these recommendations is pretty easy to understand.  In ZI, the name of the stock as well as its symbol and the exchange on which it is traded are noted.  In ZS the symbol alone suffices.  Since we are Americans and the great majority of our subscribers are Americans, we prefer to trade on the US exchanges.  So in cases where a company has liquid listings in major markets in multiple countries, we virtually always choose to trade the US listing.  But if the US listing is illiquid such as a Pink Sheet or a US listing doesn't exist, then we will trade the stock on a major foreign exchange and note that accordingly in our recommendation.

In ZI, the recommendation date is in the format of month/year.  In the example above, the "Rec 7/05" indicates this trade was first recommended in the July 2005 issue of Zeal Intelligence.  If you want to go back and see the original rationale behind any trade, all you have to do is look in the issue where that particular trade originated.  Back issues of ZI are available in the Subscriber Charts section of our website, in the upper right corner under "Archives".  In ZS, the full date of the trade recommendation is given which corresponds to a specific ZS issue.  To find out exactly why any Zeal trade was launched, please see the originating issue.

The recommendation price in ZI is always the closing price for the trade on the last trading day immediately preceding the ZI publishing date.  Since ZI is typically published on the morning after the last trading day of each month, the recommendation price is always the monthly close for a particular trade.  Most of the time in ZS, this recommendation price is the daily close the day the trade was recommended.  In some cases, however, a ZS Flash Alert may be e-mailed intraday in which case the recommendation price is the market price when the Flash Alert was issued.  These recommendation prices, of course, will never change throughout the life of a trade unless the underlying stock splits.  In the case of a split, we will adjust the recommendation price accordingly to stay in sync.

The current price is the closing price the day before the ZI was published or the closing price the same day the ZS was published.  When the original recommendation price is subtracted from this current price and the resulting difference is divided by the recommendation price, it results in the current gain/loss.  This gain or loss is always unrealized unless it marks the close of a particular trade, in which case "FINAL" will be written in immediately after the gain or loss.  These gains and losses are rounded to the nearest whole percent.

Stop Losses  At Zeal we run strict stop losses on all of our stock speculations in order to protect our capital.  Stop losses are one of the most powerful risk-management tools that we traders have at our disposal.  They effectively remove all the angst and emotional peril from the most difficult part of any trade, the decision of when to sell.

Stop losses are sell orders placed in advance with your broker that trigger when a certain predefined condition is met.  In our case, it is when a stock retreats by more than a certain percentage from its best levels achieved during our trade.  These are called percentage trailing stops.  The trailing designation means they trail a trade higher, automatically rising as a trade rises in price.  But stops only rise, they never fall.  If a trade slides back down low enough to hit its stop, it is automatically sold by your broker.

In our recommendation format described above, up arrows in front of either the stop price level or trailing stop percentage mean that they have risen since the last ZI or ZS was published.

Stop Loss Mechanics  At Zeal we prefer using trailing stops that trigger after a trade falls a certain percentage from its best levels we saw during the trade.  This percentage varies depending on how volatile each stock is, but we typically run trailing stops of 15% to 25% on new stock positions.  These percentages are automatically figured off of intraday levels, not just closing prices.

As an example, imagine buying a stock at $10.00 per share.  Initially we would probably run a 20% trailing stop on it.  So right after you purchased this stock you would immediately enter a sell-stop order on it with your broker, telling your broker to automatically sell it for you if its price falls by more than 20% from its best level witnessed during the lifespan of your trade.  In this $10 stock, the initial 20% stop level would be $8.  If it falls below $8, the trade is not working out as you originally expected and should therefore be sold immediately.  This $8 stop can be calculated two ways.  A 20% stop on a $10 stock is $2, so $10 minus $2 equals an $8 stop level.  Alternatively, 100% less the 20% stop percentage yields 80%.  80% times $10 equals an $8 stop level.

On the next day, imagine this stock you just bought rallies.  It achieves a $10.43 level in the afternoon but then fades into a $10.21 close.  Where is your new stop?  With a 20% trailing stop, the actual stop price is always 20% behind the best levels of the trade.  Stated another way, the actual stop price is 80% of the best levels of the trade.  So in this case our new stop is 80% of $10.43, or $8.34.  This means that if the stock starts falling and slides down 20% to $8.34, our broker will automatically sell it for us and realize our loss.

On the second day, imagine this stock falls modestly.  It opens at its previous $10.21 close, rallies to $10.30, and then once again fades into the close at $10.10.  Now since this stock did not achieve a new high above its previous best-of-trade $10.43, nothing happens to our stop.  It remains 20% back from the prior day's $10.43 levels, or at $8.34.  So trailing stops are only raised on days where a trade hits a new high level since we launched it.  Trailing stops are raised when a price rises, but left alone when it falls.

This sounds like a lot of work, checking the best intraday levels of every trade every day, but this is all automated and done by your broker's computers.  All you have to do as a trader is put in a sell-stop order for a certain percentage back and then the broker does all the rest.  To see what percentage to put in your sell-stop order, check out the end of each Zeal trading recommendation to see what percentage of trailing stop we are running on our own positions in that particular trade.  All you have to do is mirror us.

Ratcheting Up Stops  Generally the stop price level rises as a trade thrives but the trailing stop percentage remains constant.  In some situations though, we actually raise the stop percentage.  This is called ratcheting up stops.  Stops are typically ratcheted up late in an upleg as the next interim top looms.  For example, if we own gold stocks and the gold-stock bull is starting to look technically toppy, we will ratchet up the stops on our gold-stock trades to preserve more of our gains through the inevitable correction.

At Zeal we usually ratchet up gradually in 5% intervals.  If the latest gold-stock upleg seems to be nearing its end technically, we will raise our stops from 20% trailing to 15% to start.  This ratcheting up can continue until the stops are only 5%.  You will know a stop has been ratcheted higher if there is an up arrow right before its trailing stop percentage.  Up arrows before the actual stop price level, however, merely mean that the markets have pushed a trade higher and hence its stop-loss level is automatically lifted up too.

Using our $10 stock as an example, let's say it rallies 50% over six months.  Now it is trading at $15 and we have a 20% stop still.  Thus if our stock retreats more than 20%, back to $12, our broker will automatically sell it for us.  This automatic sale at $12 will create a 20% realized profit for us.  But what if the entire sector the stock is in is looking very overbought when our stock is near $15?  In this case we may choose to ratchet up our trailing stop percentage to 10%.  A 10% stop on a $15 stock is $13.50.  Once this stop is ratcheted up to 10% trailing, then our broker will try to sell our stock if it falls under $13.50.  This would yield a larger 35% realized profit as compared to the 20% trailing stop's 20% realized profit (each number being 20% is coincidental here, not a rule).

Stops are usually initially set pretty loose to give the underlying stock time to move in the direction we expect.  But as the underlying swing in the sector that is carrying our stock higher starts to mature, we tighten up our trailing stop percentages.  This maximizes our realized profits near major interim tops while minimizing the risk early on in a trade that we will be stopped out prematurely.  It gives trades the initial room they need to climb up higher with typical volatile sawteeth patterns of advance and retreat.

So, in summary, an up arrow on the trailing stop percentage means we are ratcheting up our stops and you have to cancel your existing sell-stop order with your broker and enter a brand new one at the new higher stop percentage.  Naturally upping the trailing percentage will also raise the actual stop price level.  But in cases where the stops are not ratcheted higher but the stop price level has an up arrow in front of it, then the stop price level is just rising because the trade is achieving new trade-to-date highs.  In this case nothing needs to be done because your broker's computers have already computed your latest stop for you.

Stop Loss Theory  Why are stops so important?  They remove dangerous emotions from sell decisions.  The natural instinct of new traders is to take profits fast.  As soon as they are up modestly, they get nervous and realize their small gains because they are scared those gains will evaporate.  New traders also tend to let losses multiply.  When they have a losing trade they refuse to sell it and realize the loss, instead holding and hoping it will return to breakeven so they can sell it.  This strategy is not the way to win.

The way this game is supposed to be played is just the opposite.  Elite speculators let their wins run as long as possible, letting wins multiply larger and larger until they are finally mature enough to harvest.  And elite speculators also cut their losses as soon as possible.  If a trade moves against them they want out right away so their loss is small and manageable.  After "Buy Low Sell High", the second most important axiom of investment and speculation is "Let Winners Run, Cut Losses Fast".  Stops do this automatically.

With trailing stops in place, wins automatically run unmolested so they can multiply and losses are automatically sold fast.  No matter how big your unrealized win is, 10% or 100% or larger, you don't have to worry about when to sell because the markets will make the decision for you by triggering your trailing stop.  This is usually just after short-term trends change which is the optimal time to exit winning positions and realize profits very early on in a correction.  This mechanical system of realizing wins automatically gives you the emotional fortitude to ride winners to the largest possible realized gains.  Wins have time to mature into big wins.

Conversely on the losing side, stops take you out of a losing trade and spare you the emotional angst associated with losing.  Once your capital is out and safe, even at a loss, then you can finally regain the objectivity that is very difficult to maintain when your capital was at risk in a losing trade.  No matter how promising a trade is over the long term, if it moves against you over the short term then your timing was wrong and it is time to exit.  Losses are sold as soon as your trade falls far enough to trigger your trailing stop, a completely mechanical system that cuts your losses fast.  The less capital you lose, the faster your portfolio will grow.

Since you don't have to worry about selling as your broker will do it for you automatically when your stops are hit, you don't have to watch the markets all the time.  A long-time friend of ours at Zeal describes stop losses as "a partner working with you 24/7 for no pay who is way smarter than you are and who never panics".  Stops free you from worrying about your trades and let you get away from your computers and get out and enjoy life.  You transfer the burden of sell decisions to the markets and create far higher probabilities that you will ultimately achieve excellent trading success in your own portfolio.

Stop Loss Limitations  Stops aren't perfect.  While they tilt the odds of success a long ways into your favor, they do not always trigger at ideal times.  One example is the dreaded whipsaw.  A whipsaw happens when one of your trades suddenly falls down just below your stop, forcing an automatic sell.  And then within days after your sale, the stock shoots back up into what would have been profitable territory if you still held the position.  Getting whipsawed is not any fun and is a risk inherent in stops.  It isn't too common.

Another time stops fail is when prices gap open.  Let's use the $10 stock described above as an example again.  Say it was a junior gold explorer with a single project, in Venezuela.  While it is trading at $15 at Friday's close, over the weekend the Venezuelan government announces it is nationalizing the company's one project.  On Monday morning when trading resumes, the company will probably open under $7 due to crushing selling volume on the horrible surprise news, over 50% lower than Friday's close.

This gap open means your stop didn't have the right conditions to trigger until Monday morning below $7.  So if you had a 5% trailing stop on this company, at $14.25 on Friday, the first time it would trigger is Monday morning under $7.  Once your stop triggers, your sell order becomes a market order.  So your broker would sell you out at the prevailing market price, under $7, immediately on open Monday.  Your 5% maximum loss you thought your stop locked in turned into a 50%+ realized loss from the close prior to the gap open.  Unfortunately stops do not protect against crazy news-driven gaps occurring outside of normal trading hours.

In the past, some traders worried that market makers would run their stops.  This involved an unscrupulous market maker seeing where most stops were placed and trying to force a temporary anomaly that triggered those stops, such as selling short to engineer a fast and short decline.  While still a risk today, it is quite trivial.  These days many brokers keep their clients' stops in the brokers' own computers and do not transmit them to market makers at exchanges until they are triggered.  So market makers cannot see them in advance.  Nevertheless, since stops are usually set at fairly logical levels market makers can make good guesses of where they lie.  They can probably only run them in the smallest of companies though, smaller than our average stock trade at Zeal.

Finally, brokers generally don't allow stop loss orders on all stocks.  On really small companies, particularly ones traded in the Over-the-Counter Bulletin Board exchange, brokers usually do not allow sell-stop orders.  In these cases, we still publish a stop but it is a manual stop.  If you mirror us on an OTC trade that cannot accept an automated trailing stop, then be ready to check the price of your trade periodically and monitor your stop levels.  If the trade starts getting close to your stop, you should probably check it a couple times a day and be ready to manually sell it when your stop is hit.

Probabilities Game  Despite these limitations, stops are a perfect tool in the ultimate probabilities game where our own emotions conspire to work against us.  Over time, even with occasional stops that yield suboptimal sells, the discipline stops impose on trading will put you in a far better position to thrive.  Stops will help you ensure that you let your winners run and multiply to the kind of large gains that can rapidly build your wealth.  They will also ensure that your losers are small on average, minimizing capital drawdown when your trades happen to be wrong.  Over time the combination of letting wins run and cutting losses fast yields great success.

If you are going to trade with us at Zeal, you should also use our risk-management program of running trailing stops.  Since we are mere mortals just like you we cannot see the future and not all of our trades will be winners.  By using stops we give the winners time to thrive and we prune out the losers as soon as possible.  And all emotions are removed from the selling process.  If you are mirroring us in our trades but not in our stops, you are running overall portfolio risks way higher than ours that may just bite you.