Saturday, November 11, 2006

Whenever I Fail

And yes, kiddies, I do fail – not often but 1 out of 5 trades will go sour on me. I have analyzed these failures and in almost every instance it was because of one of two reasons – either I placed my stop in the wrong place by pennies or I was not patient.

Nothing annoys me more than putting a stop in some 50 or 60 cents below the price – going away then coming back and finding that the stop was swept and the stock had gone up a buck in the interim. And this has happens too frequently to be an accident. The worst part is the price might not have been that low – maybe only the bid hit your stop and they took out my trade anyway off the bid being that low for a single instant in time.

Other times the specialist running the stock just dropped down for a minute to sweep all the stock up below a particularly large offer that he had just received and he made instant huge profits as a result. My solution, of course, is to only play well-regarded highly liquid stocks outside of earnings announcements. Although to be honest if an announcement comes that drops your stock - just because you have a stop doesn’t mean crap – you are going to lose anyway. This is something I wasn’t aware of until one day several years ago now I lost 25% of an investment in such a manner and even though I had a stop – tough. If there is no bid at your stop you don’t get to use it. But by playing highly liquid stocks that are generally well regarded you really don’t need a hard stop so most often I don’t use one.

But the biggest problem is patience – part a - I get impatient with trades that just sit so I close them out only to watch them go up immediately thereafter. Or, part b - I see a trade that drops down a little and I panic and close it out only to see it go back up.

The solution to part a - if a trade isn’t losing money then it shouldn’t be closed – Doh!

For part b - if the trade does drop if it was played properly it probably will bounce off the EMA right below it and shouldn’t be closed until it clearly passes through that EMA. In other words wait for the price to tell you to close and don’t just close arbitrarily. In almost every instance a stock’s price will bounce after it goes down which will permit you to get out nearly even if not a little bit in the black. You must keep this in mind as you trade and not adopt a doom and gloom scenario to everything.

Now I know that I said in almost every instance this is why I fail by which I mean that 2 out of 3 of my failures are due to the above. The third instance of failure is almost always - I jumped in too soon and didn't let the set-up develop. That is easily solved - follow the process!!!!

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