Trade Review: (PWRD)

I don't like reviewing my past trades. I feel either there is some obvious reason that I should not have purchased a stock, or else it's just simply the odds that not every stock I pick is going to succeed. I've reviewed my trading career and there were strings of horrible trades - looking back it's easy to see that my head wasn't in the right place at all. As I'm improving though, I'm not sure how reviewing failed trades will help.

I can surely find flaws in any stock that has lost me money - the same as I can find flaws in those that have made me money. If it was such a sure thing to find which flaws lead to failure and which do not, well then I'd never lose any money.

Having said this, every successful trader I've read about reviewed(s) their past trades. Therefore I'll do it - whether I fully understand the value or not. I suppose it's enough even if I find one quality in ten reviews that benefits me in the future. Maybe every stock that lost money is not a failure on my part, but I'm looking for any that are.

There is nothing that jumps out at me when I look over (PWRD). I won't discuss again why I liked (PWRD), you can find that in the post I made when I bought it. At the time I purchased it I knew the group was weak, but as I had written about when I purchased (SOHU), there were a nice number of stocks moving well in the group. (SOHU) has been very successful, just making new highs again last week.

At the time of the purchase I did note the cash flow was less than ideal, and the fund ownership had decreased. These are not positive characteristics, but they also do not rule out a stock from potential purchase in my opinion. Fundamentally and technically, I don't find anything wrong with this purchase.

However, I have found an issue with how I purchased and owned (PWRD), and in fact it opened up a window to a change I can make in my buying and stop loss management that has already cost me a good deal of money.

The traders I've read about all recommend 'pyramiding' up into a purchase - buying more of a stock as the price increases. I've tried to stick with this practice in the way IBD recommends - purchasing 50% of my position at the buy point, another 30% as the stock advances 2.5%, and the final 20% as the stock advances to 5% past the buy point.

The idea behind this methodology is that you add to your position as the stock 'proves' itself. I think the idea is correct, but the implementation that IBD suggests is flawed. A stock advancing 5% proves nothing, in my opinion. I don't have the exact numbers, but I'll bet that 10 to 20% of my losing trades were up at least 5% before turning around. By pyramiding up this close to the buy point, all I've done is increase my cost basis, and therefore I stop out sooner or lose more money.

Instead, I'm adopting a new approach. I'm going to go in with 60% of my position in my initial purchase, as close to the buy point as possible. If the stock advances, I will trail my stop loss order up based on the closing price. If it closes one percent higher than the buy point, I'll move the stop loss up one percent, and so on. I'll do this until the stop loss is at my break-even point, and then I'll leave it alone.

If the stock advances 20% in more than three weeks, I'll sell and take my profits. If it advances 20% in less than three weeks, I'll look to add to my position at the next pullback or base.

If I have continued success this way, I'll eventually up the ante on my initial purchase to 70% or 80% of my position, eventually I may even buy the whole position in the first purchase. Then any additional buys might be on margin - again only after I have more experience and a track record of positive results.

This is what I've learned looking at (PWRD) and similar past trades. I'll make this adjustment for a time and see how it works out, and I'll change it as needed. Trading stocks is a dynamic endeavor - that's what keeps it interesting.

-Geoff