Trading Profits of A Swing Trader: Our Basic Formula

The Starter Investor Trading Profit Formula

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

TRADING PROFITS ARE RECKONED according to the formula suggested by Benjamin Graham, author of the book The Intelligent Investor: The Classic Text on Value Investing.

The use of this equation was illustrated in a previous post entitled Measuring Our Stock Trading Profit. We define trading profit as the difference between the previous total sell price and the new total buy price.

Hence, our stock trading operating cycle starts with our cash position which is then converted into our stock portfolio upon completion of our buying order. Selling our stocks creates receivables. Upon collecting cash from the sale transaction, the operating cycle starts anew when we use the cash collection to pay for our new buying order.

Swing Trading

Swing Trading is, at this time, the primary business activity that drives our stock trading operating cycle, as well as our main profit generator.

Trading Profit Updates

The main goal of our operations is to demonstrate how many trading cycles it will take before we double our money.

We achieve this by generating a trading profit of at least 4,050 pesos based on initial trading capital mentioned in one of my previous posts Awakening of the Marginal Investor or Speculator.

Cycle No.		Date		Shares	Total Buy Price		Total Sell Price		Trading Profit		Profits To Date
		23-Feb-09		20	4,055		-		-		-
		27-Mar-09		20	-		4,414		-		-
1		01-Apr-09		20	4,067		-		347		347
		17-Apr-09		20	-		4,434		-

Last Update: April 26, 2009

This post is updated regularly with the latest completed Stock Trading Operating Cycle.

The BPITrade Settlement Account: BPI Direct Savings Bank

BPI Direct new maintaining average daily balance

The BPITrade announcement

BPI TRADE LOWERED THE MONTHLY MAINTAINING Average Daily Balance of BPITrade settlement account with BPI Direct Savings Bank, says the email advisory it sent out to clients:

--- On Thu, 4/23/09, bpitrade@bpi.com.ph wrote:

From: bpitrade@bpi.com.ph
Subject: BPI Trade Settlement Account
To: Marginal Investor
Date: Thursday, April 23, 2009, 4:12 PM

Dear BPI Trade clients:

Greetings!

Please be informed that the monthly maintaining Average Daily Balance (ADB) of your BPITrade settlement account with BPI Direct Savings Bank has been lowered from P5,000 to P500.00. As a non-ATM deposit account, the BPITrade settlement account will earn interest as follows:

Interest Rates (per annum)
If daily balance is:
PhP 0 - 499 0.000% p.a.
PhP 500 and above 1.750% p.a.

Please visit the FAQs on the BPITrade website for more information.

Thank you.


BPI Trade Team

Visting the BPITrade FAQs

Following the suggestion, we visited the FAQs page on the BPITrade website for more information:

"What is the minimum investment required to open a BPITrade account?

There is no minimum investment required to open a BPITrade account. However, before you can purchase shares of stock, fixed income securities, or mutual funds, you must first deposit funds into your BPITrade Bank Account. The BPITrade bank account ("Settlement Account" maintained with BPI Direct Savings Bank) requires an Average Daily Balance of only PhP 500.00 (emphasis by Marginal Investor)."

 

Good for starter stock traders

This development is a boon to the beginning stock trader. First, it decreases the time required to accumulate sufficient funds for starting your first stock trading operating cycle. Second, it contributes to the much needed liquidity or cash position of the beginning stock market investor.

For those familiar with the game plan proposed in my earlier posts How to Build Equity for Your Speculative Stock Trading and Finding the Money for Investment, we said that for one who saves a minimum of 275 pesos monthly or on the average 2% to 3% of his or her monthly salary or earnings, we need a year to accumulate funds for opening and maintaining a BPI Expressteller Savings Account.

With the lowered monthly maintaining ADB of a BPITrade Bank Account, it would now make sense to open a BPITrade Account in just over a year of saving money, and place our first stock market buy order in under two years of accumulated savings. Third year into our savings program, we are already warming up on the stock trading game, and well on our way to converting our stock trading profits into a more secure investment vehicle like investment funds.

Measuring Our Stock Trading Profit

The Starter Investor Measures Trading Performance

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

KEEPING TAB OF OUR TRADING PROFIT is more about tracking our success in the stock trading game. But how do we measure our accomplishments?

Reinvestment

"In a continuous program" says Benjamin Graham, the author of The Intelligent Investor: The Classic Text on Value Investing, "no market profit is fully realized until the later reinvestment has actually taken place."

Trading profit

In more concrete terms, the "true measure of the trading profit" Graham says in Chapter Two entitled The Investor and Stock-Market Fluctuations, "is the difference between the previous selling level and the new buying level."

For illustration, let us use the completed stock trading operating cycle mentioned in a previous post on  BPITrade Updated Fee Structure:

This shows a trading profit of almost 8 percent based on our previous total sell price. Just maintain similar results in the next 9 to 12 stock trading roundtrips and you are on your way to doubling your money probably.

Buy Stocks or Hold Cash in High Market Levels

The Starter Investor Buys Stocks

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

DECIDING TO PUT YOUR MONEY IN STOCK OR KEEP YOUR CASH ON HAND during high market levels may not be an easy task for the marginal investor.

But the following insight should help: "On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is higher than can be justified by well-established standards of value" says Benjamin Graham in Chapter Two of his book The Intelligent Investor: The Classic Text on Value Investing.

Sometime in February 2007, we needed to make a choice between keeping our cash on hand or making an investment and buying 10 shares of Ayala Corporation at 630 pesos per share when the general market level is high by my reckoning.

Deciding to invest in stocks

Keeping the money with me will expose my funds to the greater risk of tempting alternatives like buying a digital camera, eating out and going shopping, or enrolling in that short course for a home-based business. I ended up buying the Ayala Corporation stock and assuring myself that it is better to have a long-term investment and a possible paper loss of 50 percent that can be fully recovered over time than no investment at all.

Stock and cash dividends

By the end of March 2009, I had received 4 shares for stock dividends, about 137 pesos for cash dividends, and 128 pesos for value of fractional shares from the stock dividend.

Based on the closing price of 206 pesos, the nominal valuation of my investment portfolio is about 3,150 pesos. The total cost, however, of my investment including BPITrade upliftment fee is 6,515 pesos. This meant I had a paper loss of nearly 52 percent.

Precisely, my paper loss is almost the value approximated by Benjamin Graham that an investor may experience in a well-defined bear market.

Therefore, so long as there is no "convincing indication that the underlying values have been permanently affected" - this Starter Investor has no worries.

How to Build Equity for Your Speculative Stock Trading

The Starter Investor Strategy for Building Equity

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

STRATEGIES FOR BUILDING YOUR EQUITY for the purpose of stock trading are derived from what I shall call the Marginal Investor Triangle.

We start out with generating savings being our main objective, hence making us Savers.

Since savings does not offer protection against inflation, we seek a complementary activity that shall serve as a hedge. Thus, we become attracted to the hedge provided by capital gains obtained from engaging ourselves in the stock trading business, partly transforming us into Traders.

When the saver and the trader are placed in the presence of each other, they attract one another and from their union is born the Investor and his investments. This point completes the formation of our Marginal Investor Triangle. 

Saver

Clearly, the starting point for the investor described in my previous post Finding the Money for Investment is generating savings. Set aside no less than 275 pesos monthly and within a year, we shall have a desirable balance for opening a BPI Expressteller Savings account: 3,000 pesos.

Investor

Continue with your savings program and by the second year, we shall be ready to open our BPITrade account in preparation for our stock trading operations.

 

The First Step: Starter Stock Trader

By the third year of our savings program, we shall have the equity for speculative stock trading. From being savers, we now become swing traders looking for buying opportunities and capital gains by investing in the Philippine Stock Exchange.

The Goal: Intermediate Stock Trader

We shall continue with our saving and trading activities until we can build a fund of over 50,000 pesos. Why this amount? Because this is the minimum price of our ticket to the world of BPI Investment Funds.

BPITrade Updated Fee Structure as of April 1, 2009

NOTE: This is an old post and most of the details are not current anymore. We are not updating this post anymore since its posting on April 11, 2009. So, readers are advised to go straight to the BPI Trade website for more details. Here is the link to the BPI Trade FAQs:

BPI TRADE FAQs

BPITrade Updated Fee Structure

BPITrade updated its fee structure beginning April 1, 2009. Here is the email message sent to BPITrade clients:

From: bpitrade@bpi.com.ph
Subject: BPITrade Updated Fee Structure
To: Marginal Investor
Date: Tuesday, March 31, 2009, 1:48 PM

Dear BPITrade Client,

In line with the implementation of the Documentary Stamp (DST) for Buy transactions, we are sending an updated Excel file which will aid you in determining your Buy and Sell transaction costs and proceeds. The breakdown of your Net Buy and Net Sell amount are presented in detail.

In addition, we are also providing you with our updated fee structure in the table below. Effectivity and implementation of the updated fees/charges will be on April 1, 2009.



For further inquiries, please call us at 816-9190 or 816-9192. Thank you very much.

BPI Securities Corporation

For illustration purposes, let us use a buy and a sell transaction under 8,000 pesos in value that we did while trading our Ayala Corporation shares:

From our total sell price of 4,414.27 pesos , we take out the total buy price of 4,067.08 pesos to give us a capital gain of 347.19 pesos or about 8.5% yield based on total buy price.

In these two transactions, our selling price of 223 pesos less buying price of 202 pesos will make a 420 pesos gross margin for 20 shares.

Then, we split our gross margin with BPITrade by about 4:1 ratio. We take over 80% while BPITrade gets under 20% of the gross margin in this completed stock trading operating cycle.

Next Post: How to Build Equity for Your Speculative Stock Trading Operations

Marginal Investor Swings with the Stock Price

The Starter Investor Learns Swing Trading

Effective from our update on April 5, 2023, we have rebranded from Marginal Investor to The Starter Investor. For additional details, please visit our About Us page.

BECOMING A GENUINE INVESTOR in common stock is our ultimate goal. You may read that the previous two posts are parts of a series that will show how Marginal Investor understood and applied the principles and techniques described in the book The Intelligent Investor by Benjamin Graham in the context of a beginning investor who is a Filipino, residing in the Philippines and with a shoestring budget to begin with.

Investment Money

You may also find in Awakening of the Marginal Investor or Speculator that I suggested using the speculative method of stock trading and taking advantage of quick price changes until one has the amount of over 50,000 pesos. Of course, one may invest in common stocks through the Philippine Stock Exchange with funds under 50,000 pesos. But this would be insufficient to create the suggested diversified portfolio of common stocks giving one the expected 4% to 8% average annual return. For this reason, I would put on hold the series about the Intelligent Investor until that time when we have complied with Marginal Investor's proposed fund requirements.

Investors and Stock Traders

Nevertheless, Chapter Two of The Intelligent Investor is so much related to the stock trading game that I would still venture to include some portions of it here. Entitled The Investor and Stock-Market Fluctuations, this chapter offered some description of the proper attitude that investors should take in the matter of price fluctuations in common stocks. Since, for the time being, we shall play the role of stock traders with speculative tendencies at that, we shall note the warnings and pick up suggestions as they apply to us.

Buy Low, Sell High

In discussing Market Fluctuations in Individual Stocks, it mentioned that the principle of buy-low-sell-high can be applied more satisfactorily with primary reference to individual stocks and with comparatively little regard for the level of the general market. The maxim is: "Buy during periods of of pessimism and low prices; sell during periods of optimism and high prices." This is just exactly what we need to understand because we are focusing only on one issue: Ayala Corporation. And we shall use the facilities of BPI Trade for our online stock trading.

Swing Trading

Furthermore, while we were digressing from our main focus of investing towards stock trading, we will be maintaining a clear view of our overall goal at all times. Talking about stock trading, stock traders typically gravitate around any one of the major styles of equity trading and stick only to that style. For our stopover, this Starter Investor decided to play the role of a swing trader.

Playing the role of a swing trader, we shall hold our Ayala Corporation shares for a period of time, generally a few days or two or three weeks, and we will trade this stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism, following our maxim.

Stock Trading Operating Cycle

In the introduction to my previous post, I explained how I completed my first stock trading operating cycle, from 4,050 pesos cash to buy 20 shares of stock to generating receivables, then collecting the receivables and converting it back to cash and picking up 350 pesos appreciation of my principal in the process. Here is what the operating cycle looks like:

Waiting for the Swing

In the first week of April, we started a new roundtrip by using 4,080 pesos of our cash to buy 20 shares of Ayala Corporation at 204 pesos per share. Since our goal is to generate a minimum return of 6% for our total available cash position every roundtrip - which at this time is 4,400 pesos - then we need to obtain net capital gains of 265 pesos.

Transaction Cost

Transaction costs for selling our stock inventory are about 1% to 2% of gross sales. For this cycle, we should consider selling only when the price is over by a minimum of 8% based on our total purchase cost of 4,080 pesos, which means an offer price of 221 pesos per share. What we need to do now is simply wait for the stock price to swing from 204 pesos to 221 pesos per share.


Next Post: BPITrade Updated Fee Structure and Stock Cost-Proceeds Computation

Awakening of the Marginal Investor or Speculator

The Stater Investor Triangle

As of our April 5, 2023, update, we have changed our name from Marginal Investor to our current name, The Starter Investor. Please refer to our About Us page for further information.

TO SELL AT A MODEST PROFIT was an opportunity so tempting I took advantage of it without hesitation. I am referring to my decision last week of selling all of what my so-called stock portfolio consists - the 20 shares of Ayala Corporation at 220 pesos per share. I bought these shares in two board lots of 10 shares each:

• 10 shares on January 29, 2009 at 207 pesos per share; and
• 10 shares on February 23, 2009 at 198 pesos per share.

My total acquisition cost for these 20 shares is 4,050 pesos. This trading cycle gave me a net earnings of 350 pesos or close to 9% capital gains in three months.


Precisely, this is one situation the book The Intelligent Investor warns about when one is seriously involved in investing. Specifically, Chapter One of the book was entitled What the Intelligent Investor Can Accomplish. This chapter was organized as follows:

• Introductory paragraphs

• Investment Before World War I and Today

• Results to Be Expected by the Defensive Investor

• Tax-Exempt Bonds: State and Municipal

• Results to Be Expected by the Aggressive Investor

• "Yes" and "No" Table for the Investor

• The Investor as Security Owner

Of course, some portions of this chapter may no longer be relevant today. But that is offset by the larger portion describing the valuable insights and suggestions that any beginning investor should know. The introductory paragraphs presented several concepts that are fundamental to understanding this whole idea of investing.

Investing Defined

"An investment operation is one which, upon thorough analysis, promises safety of principal, and a satisfactory return. Operations not meeting these requirements are speculative."

The Investor

Our typical investor contemplated by the book is one who:

• emphasizes the safety of the principal.

• buys securities outright.

• holds these securities for a considerable period.

• more interested in annual income than in quick price changes.

The word intelligent was given the meaning endowed with the capacity for knowledge and understanding. Interestingly, however, the intelligent investor is more about character than of the brain.

The two categories of investors are the defensive or conservative investor, and the aggressive or enterprising investor.

Defensive investor

For the defensive investor, intelligent action is largely the exercise of firmness in the application of relatively simple principles of sound procedures. 

Aggressive investor

In contrast, the first rule of intelligent action for the aggressive investor is never to embark on a security purchase which he does not fully comprehend and which he cannot justify by reference to the results of his personal study or experience.

Investing in Common Stock

The emerging trend at the time the book was written, was the inclusion of common stock as an integral and important part of a sound investment program. Among the advantages cited, related to tax considerations, is that common stock can be selected more on the basis of capital gains expectation rather than current income. There must be some caution, however, because paying attention to the appreciation of the principal may lead the investor into speculative attitudes and operations resulting in financial loss.

Another advantage of common stock is based on long-term experience. A diversified holding of representative common stocks was found to be more profitable than a bond portfolio. Provided, the shares were purchased at reasonable market levels, that is, levels that are reasonable with respect to well-defined standards derived from past experience.

Results to Be Expected by the Defensive and Aggressive Investors

Defensive return on investment

The defensive investor may expect a 4% return for his money. True, this is not a brilliant achievement. Nevertheless, it is attainable with minimum intelligent effort. 

Aggressive return on investment

The aggressive investor, should he or she listen to the warnings and positive suggestions presented, may expect to double the average annual return of the defensive investor.

Furthermore, The Intelligent Investor offers this encouragement: The genuine investor in common stocks does not need great equipment of brains, and knowledge, but he or she does need some unusual qualities of character.

Marginal Investor Notes

Let us go back to the main purpose of this website described in our page About Us. We said that it is about how one may start his or her stock trading and investing activities in the Philippines from scratch. In addition, we also said that we shall limit our investment to common stock and with only one issue: Ayala Corporation.

Considering the suggestions of The Intelligent Investor and the practical situation of our beginning marginal investor, it led me to the observation that there can only be a meaningful talk about investing when one's fund is in excess of 50,000 pesos.

For any amount less than this, it is impractical to create a diversified portfolio of common stocks because of the minimum board lot requirements for purchasing shares of stock in the Philippine Stock Exchange.

In addition, focusing more on capital gains at this level may easily give one more opportunity for earnings than just waiting for the dividends. This is why we sold out my portfolio of 20 shares of Ayala Corporation and gained 9% in the process. All we need to do now is to wait for the next price change until we could buy the same number of shares at our lowest purchase price of 198 pesos or even just about 10% discount on our selling price.

Stated in a different way and sounding more like an oxymoron, we shall grow our starting capital of 5,000 pesos using the speculative methods of stock trading that take advantage of quick price changes until we have the amount of over 50,000 pesos required for our investment goals. Therefore, any lesser amount should better be applied in the only alternative available: stock trading.


Previous Post: Awakening of the Intelligent Marginal Investor: Introduction
Next Post: The Investor and Stock-Market Fluctuations