6 to 21 Strategy Part I by Daryl Guppy

I can still remember my first contact with a broker. The message was blunt. “If you haven’t got a minimum of $50,000 to start with then I am not interested.” The broker’s arrogant contempt struck a raw nerve because I felt I had as much right to make money in the market as anybody else. His comments spurred me on to understand the market, the money making opportunities, and the vital role that money management and risk control plays in trading success. In many ways, this broker bears responsibility for all the books that I have written because my objective is to cut through the arrogance of entrenched market money to show how these opportunities are available to everybody.

I started with $2,000 because that is all that I had available at the time. It was not money that I could not afford to lose. It represented a very significant part of my savings. Losing it would hurt a great deal and that immediately focused my attention on risk control. This was not a gamble. It was a well considered plan to make my capital work hard. $2,000 is not a good ‘grub stake’.

$6,000 is closer to the bare minimum required for trading because it gives the trader the ability to practice some risk diversification. Growing this capital to $21,000 is the first important step in market survival. Once trading capital reaches $21,000 it is much easier to spread the volatility risk across several open positions to protect and grow capital.

Some people continue to sneer and suggest that it is virtually impossible to grow capital from $6,000 to $21,000. This self defeating attitude is guaranteed to deliver trading failure, and failure in many other aspects of life. No one pretends trading the market is easy. It is jot. It requires more discipline than many people have. It requires a willingness to work, and work hard. This is no gamble, and there are no short cuts. This upsets many Australians who love the Tattslotto approach to life and the markets where lots of money comes for little work. When they discover making money from the market requires more work than buying a tattslotto ticket they give in – and they decide that no one else can make money from the market because it is rigged, manipulated or controlled by insiders and those in the know. Their self defeating attitudes become self fulfilling.

The market remains the most effective legal place to grow capital through the exercise of risk management techniques and personal effort. Over the next few months we will be running a simultaneous case study portfolio designed to show how capital can be grown from $6,000 to $21,000. We will be using only ordinary stocks – no derivatives of CFDs.

We start the case study with a sample completed trade in RFE*. Readers may remember that this stock was covered in the Chart Briefs section a few weeks ago. At the time we noted that one of the staff at Guppytraders held an open position in the stock. We use that trade as the starting point for the $6,000 to $21,000 case study. The trade was closed on Thursday. The chart shows the entry and exit points. The trend was identified with a Darvas box breakout. The trade was managed using a trend line. Trade entry was as price rebound from the trend line near the lower edge of the Darvas box.



Success rests upon the way we approach risk with this small starting capital. This is the most important factor. Because when we start, our focus is always on protecting capital. Usually it has taken some time to gather the capital, and we do not want to lose it. This throws up an important contradiction which any trading approach must resolve.

The way to grow capital quickly is by trading stocks which promise a higher return per trade. These are stocks with greater volatility. They can move up dramatically, and move down dramatically. This increases the risk of loss if the trade fails.

An important caveat here. This increases the risk of loss only if the trader follows a buy and hold strategy. The market experience in 2008 clearly demonstrated this. The returns from many managed and superannuation funds also confirmed this.

The first powerful impact of risk management is understanding that the trader manages risk. The market does not manage risk. The ‘I’m in for the long term’ approach believes that the market manages risk, so simply by waiting any losses can be managed. The market creates a risk environment which we manage through our own actions.

Resolving this contradiction and reconciling it with the need to protect capital involves two steps. The first is to classify stocks according to their volatility. Rather than create new categories for this, I used existing categories – blue chip, mid cap, and speculative – as a shorthand. This decision has plagued me ever since and has been a source of confusion for some readers of Share Trading. The second is to allocate capital in a way that maximizes returns within a money management structure that protects capital, and which grows capital as a result of trading activity. This is the essence of the 6 to 21 strategy.




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Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.