Our Process and Why We Use Technical Analysis

The mission of this site is simple: We are unique in that we use a product-first fundamental approach that is more akin to how venture capitalists determine great investments before rapid growth. We then double down on the product-first thesis once rapid growth begins.

We believe that tech trends follow hype cycles that are driven by microtrends, which can last for years. Within these hype cycles, a handful of companies meet the demand and the result is explosive growth. These are the companies we want to own through this cycle.  We hope this site helps you to sift through the noise and hold onto the winners while at the same time minimizing any losses.

Building Positions

After identifying companies we want to own, we then use technical analysis to increase our probability of navigating a successful entry into these positions. In other words, we will take breakout setups we see in a stock we want to own and will use a stop loss to protect our downside in case we are early.

Here is how this plays out:

We scan the price action of our stocks for favorable risk/reward setups. When we see one, we take it with a stop to minimize our losses in case we are early.

About 50% of our entries work out as intended and we are in the stock for the long haul.

The other half trigger our protective stops where we will take a 5-10% loss and try again.

When we are in a stock for the long haul, we hold through drawdowns as long as the story stays intact.

We add to new tranches to our positions during new signals of strength, as well as in weakness when we believe in the story enough. 

Also, to further manage risk, we will hedge the long portion of our portfolio when our models give us the signal by shorting a highly liquid and correlated ETF.

Risk Management

We use a number of tools to manage risk. Some of these include discretionary trimming of our position if we believe it is stretched while others include a set stop loss, which we share with our readers when the signal triggers. In short, we take the most correlated, liquid broad market ETF and short it against our portfolio. Our signals are based on a combination of trend following techniques and momentum-based algorithms. Based on the combined correlation of our portfolio at the time will determine the ETF we will short.

Our goal is to minimize our losses and let our winning positions ride, yet hedged, so we can sleep at night. Other techniques that we practice is position sizing. We personally start small with our positions and build into strength. We rarely start a position with more than 2% of our portfolio value. We will continue to add to this position until it hits our target allocation, and then let it ride. We typically look to trim if a single position, in time, takes up more than 10% of our portfolio. We do this to manage risk.

Not every trade setup will work, so we want our losses to be minimal.

If we only have 2% in a position and the price turns against us, we stop out with a 10% loss.

In this case, a 10% loss on 2% of a portfolio is negligible.

We then wait for the next setup until it sticks. 

However, one win is more than enough to make up for a couple of minor losses. We aim to cut our losers quickly and let our winners ride while protecting them in drawdowns.

In short, the goal is to trade the stock until we are satisfied that we have found a long-term position to build on. We then remove our stops, and move forward.

Here are 2 examples of how this process worked out:

On April 8th, we went long Datadog at $34.90. Beth doubled down on her conviction for cloud infrastructure and data centers following the March lows, and the momentum in the broad market was starting to become difficult to ignore. So, we initiated a trade in DDOG to play this momentum and placed a stop just below our entry for risk management. Once it closed above new highs, we removed the stop and we consider it a solid long-term position that we have built on. We guided another entry prior to their recent earnings beat around the $50 region in this update, as well.

Beth wrote a high conviction analysis based on Zoom’s potential to go viral in September. We stopped out of our first attempt at an entry in September of 2019 for a small loss. We then saw a favorable risk/reward setup, where ZM was trading in the low $60s, which was just above its all-time low of $59. The setup was very bullish and we targeted the $156 region as long as ZM did not make a new low. So, we went long at $64 with a stop just under $59. We guided four more long entries in Zoom along the way and have built our entire long-term position, which is currently up over 150% and being held without stops.

If you have any questions, you can reach out to us in our Chat Room on the forum, or email us directly at knox@beth.technology and beth@beth.technology. We only work with tech stocks on this site. We are not financial advisors, so we cannot offer personalized advice. We limit our analysis to what we believe and are actively doing with our own funds. We are happy to help with anything tech related.

The I/O Fund specializes in tech growth stocks and offers in-depth research and real-time trade notifications.

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