Saturday, March 16, 2013

Intuitive Surgical (ISRG)

BUY signal the week of 1.22.13 at $577.82. My first stop was $473.57, so my risk (R)/share was $104.25. Stopped out yesterday at $459.44. The percentage loss on this trade was -20.5%, and the reward-to-risk ratio was -$118.38/$104.25 = -1.14.

History (beginning in 2003):
Winning Trades: 4 | 66.7% | +$130.54/share avg.
Losing Trades: 2 | 33.3% | -$76.64/share avg.
Average Trade: +136.3% | +$61.48/share | Reward-to-Risk (R): +3.52
Compound Annual Growth Rate (CAGR): +19.3% 

You know, I had a feeling this trade might not work, but I didn't think it would go this badly.

Still, every once in a while, trades like this can be a good thing. Not for my trading account of course, but they do serve as a very powerful (and painful) reminder that I need to stick with my 1% risk model.

Invariably, when several of my trades are working pretty well, like Mastercard or LinkedIn, I'll start thinking about taking larger positions using a 3% or 5% risk model. 

And then a trade like this will come along and remind me that outsized gains are not my top priority. Containing losses/preserving capital actually ranks higher for me.

By the way, when I talk about a 1% risk model, I'm not talking about portfolio weighting. It just means that based on my stop, I'm risking 1% of my capital on the trade. So on this particular trade, that gave the position a 5.5% portfolio weight, and the loss of -20.5% means an overall portfolio loss of just -1.1%. Painful for sure, but it doesn't knock me out of the game.

On a side note, I'm adding Compound Annual Growth Rates (CAGR) to my metrics because I think they better represent how this system trades a given stock over time. My holding periods are perhaps longer than other traders/investors, so while it's true that the average ISRG trade is +136.3%, that doesn't factor time into the equation. I wouldn't say it's misleading, I just think there's a better way to describe the actual results of trading stocks in this system. 

So in this particular case, trading ISRG in this system since 2003 has yielded a CAGR of +19.3%.  


  1. I'm risking 1% of my capital on the trade. So on this particular trade, that gave the position a 5.5% portfolio weight. I don't understand the difference. can you give example if you have $100,000 capital. how many shar would you buy if you have 20% stop?

  2. Sure, let's take this step by step:

    1. Our beginning capital is $100,000, and we're willing to risk 1% of that capital on any one trade, so that's $100,000 x 1% or .01 = $1,000
    2. Our initial volatility-based stop for the position is $473.57, which is $104.25 (18%) below the current price
    3. We divide the $1,000 we're willing to risk by our $104.25 stop to get 9.59 shares, which we'll round down to 9 shares
    4. So we buy 9 shares at $577.82, which gives us a total cost of $5,200.38
    5. That means our portfolio weight is $5,200.38 / $100,000 = 5.2%, and our actual risk is 9 x $104.25 = $938.24 / $100,000 = 0.94%
    6. Unfortunately, after less than 2 months we get stopped out at $459.44, so 9 x $459.44 = $4,134.96 is all that's left of the position
    7. To determine our loss, $4,134.96 - $5,200.38 = -$1,065.42, and -$1,065.42 / $100,000 = -1.1%

    For a quick check, -$1,065.42 / $5,200.38 = -20.5%, so it seems like all of the math is right.

    I hope this helps to clarify things.