Roller Coaster

I've improved on my patience and discipline from last year, but I still have far to go managing my emotions. I believe if I'm still trading stocks in thirty years, I'll still be working to manage my emotions better.

Several weeks ago, when the market's rally began to struggle, I made a decision to hold all of the stocks I owned at that time: (SOL), (SOHU) and (GU). (GU) promptly rolled over and stopped out for a loss, but (SOL) held up for awhile and (SOHU) actually made new highs. I was feeling quite confident that I'd acted properly deciding to hold and ride out the correction.

I've had almost everyone aware of my decision question why I tried to hold (SOL) instead of taking profits (I've been up as much as 92%). Some folks feel that any time a stock moves that far you should sell at least half of your position. Others look at the situation more technically, and believe it was a sell because the stock had advanced 100% past it's 50 dma. I've also heard from traders who are not opposed to holding a stock for the long term and riding out a pullback, but felt that this was not the market for that.

When I decided to hold (SOL), I thought about all of these methods. I need rules to sell a stock I'm up in as well as rules to sell a stock I'm down in. The problem for me is, I find the rules for stopping a loss much more simple. I never lose more than 8% on a stock - period.

Selling a stock that's up, on the other hand, presents a variety of factors to consider.

Perhaps first and foremost - is the market in my favor? Even this question cannot be easily answered. It seems like a bear market now - all the news is bad, the economy is horrible, inflation is a problem at the same time growth is slowing... However the market often turns up in the least likely conditions. Once I've experienced several market cycles, I hope I'll develop a 'feel' for a strong bull market - but right now I'm assessing things from a purely academic perspective. Although the market does not look good, and I would not by any means suggest we are in a rally, it has also not rolled over - yet. From what I've learned, it seems we can expect another leg down if this is indeed a bear market.

Secondly, how is the stock's industry group? Has it flashed any kind of climax signals? The Chinese market in general and solar stocks in particular have been under pressure, but again have not suffered any major damage.

Third, what is the technical action of the stock? Has it violated any key technical support levels on high volume? Has it become too extended, indicating it's due for a pullback or correction?

There's more of course, but I've tried to distill the considerations into what I think are always the three main concerns: the market, the industry group, and the stock.

Without rehashing it in detail, when I decided to hold (SOL) I thought the market and the Energy-Other group were reasonably good, and the stock itself had flashed no warning signs. It did appear ready for a pullback, but I saw no reason to suspect it would not be orderly, and the stock appeared to have strong institutional sponsorship to offer support.

There are two strong arguments I've heard against my decision to hold. The first comes from what I'll call the 'active traders' camp. These folks are pretty active - they ride strong breakouts for quick profits, frequently cashing in at 15% or 20% gains and moving onto the next stock. I've also heard this referred to as 'swing trading,' and it can be very successful.

A swing trader would've taken profits in (SOL) when became extended 100% past the 50 dma - and they would've made nice profits. They know the law of averages says that most stocks this extended will correct, by cashing in they remove the risk of riding out the correction, and can often take a position in the stock again at a lower price in the pullback. By taking profits though, they can avoid the stock if the pullback looks unhealthy or market conditions change.

This is a pretty difficult strategy to find fault with. I suspect that swing traders suffer more losses on failed entry points simply because they are more active, but I have no facts to support my suspicion.

The second argument I've heard does not find fault with holding a stock with great potential through a pullback or correction, but stresses that this should only be done in a strong bull market. Again, that's a difficult position to argue with.

Investing is about keeping the odds in my favor. My interpretation of the CAN SLIM selling rules kept me holding (SOL), but I certainly could've interpreted the rules wrong. I've quoted here a number of times the special situation that calls to hold a stock for eight weeks if it advances 20% or more in three weeks. However, I could also quote a number of passages from 'How to Make Money in Stocks' that would've indicated I should sell the stock, based on market factors if no other reason.

I'm glad I've experienced holding a stock through a pullback. I've had to live through a 92% gain becoming a 10% gain. In the future this will help me immensely when I have to decide again whether I want to try to hold a stock through a pullback. I'll know what it feels like, I'll know the emotional turmoil it can cause.

It's easy to be resolute conceptually - but when the money starts going away my emotions begin to play tricks on me. I argued with people when the stock was above the 50 dma that I'd made the right decision and it would work out. When it crashed below the 50 dma I admitted I was wrong and should not have tried to hold the stock. When it seemed to find a bottom today, and I began to see a reason for the drop and the potential for a comeback, I started to think I might've been right after all. I've been through all these emotions and more in just the past two days; anger, frustration, disgrace, hopelessness, resolve, elation, indecision, and more.

Here's the real danger of letting emotions get the best of me. Yesterday, as I watched in disbelief as (SOL) continued to plummet, I broke my own rule and moved my sell stop up on (SOHU). I have a rule not to make sell decisions intraday - exactly for this reason. It's just too emotionally charged. So, I had a stock that was behaving poorly in (SOL), which I held, and a stock that was behaving well that I sold for only a 9% gain in (SOHU). (SOHU) had an average volume pullback to the 10 wma and came off it nicely. This is a strong stock that appears to have fine institutional support, and I wish I had not panicked and sold it.

It defies explanation really. In the moment, all I could feel was shame for being wrong and a need to salvage some profits. So why didn't I sell (SOL) instead? Partially ego and partially because I didn't want to compound my mistakes by selling (SOL) at the worst possible moment. I didn't want to be shaken out, even though it's now trading below the 50 dma. As my coworker said, the 50 dma 'is not a wall' - a stock can trade below it for some time but does eventually need to retake this level. Hard part is knowing how long to give it.

There's a lot more to the (SOL) story, but I've written more than I expected tonight so I'll have to continue with that later.

Hey, I think that's my first cliff-hanger!

-Geoff