Trade Review:(SNDA)

This one is pretty easy. I managed to string a couple of winners together and my ego crowded me out of the room. I got impatient and arrogant, and bought (SNDA) on 6/3 as they released earnings to ho-hum response from the market. It was nowhere near a sound buy point, and certainly not the kind of massive move on earnings that would forgive buying a stock without a sound buy point.

I stopped out of it for a loss a week later. This would turn out to be strike one.

Trade Review:(FUQI)

(FUQI) might be the most difficult trade review I have to do, and it was a winner.

What makes it difficult is that strictly following CAN SLIM the stock didn't have a base and should not have been purchased - however, it's been one of the top performing stocks of this rally.

When I bought (FUQI) at the end of may, the chart really did look pretty ugly. The stock had formed a long cup that was far too deep, and it had formed this pattern under $10 making it effectively 'not count.'

What I saw, however, was massive volume on the right side of the chart as the stock climbed out of this deep base. Along with this the RS line was rocketing. I simply couldn't overlook these factors and bought the stock as it cleared a prior high point at $11.75.

I've seen some ugly charts turn in the best performances of this rally - (FUQI), (STEC), and (PWRD) are good examples - and I'd be willing to buy an ugly chart again IF it has the obvious signs of MASSIVE accumulation that these stocks demonstrated.

Of note also on (FUQI) is that I sold early. The stock was behaving very well and showing great strength, and I cashed in for a 20% gain. This stock had acted well enough that I should've allowed it more time to work, at least to let it test the 10 or 21 dma before selling.

Trade Review:(LFT)

Looking at the chart of (LFT) today I can't find any reason why I shouldn't have bought it when I did. The stock found support at the 50 dma on 4/28 and bounced off of it immediately, closing at the upper end of the day's trading range on above average volume - pretty bullish behavior. The time leading up to the pullback showed (LFT) as a true leader under heavy accumulation. The relative strength line was leading. This was it's first pullback to the 50 dma which gave it good odds of succeeding, nonetheless the breakout failed.

Unless, of course, one bought the stock right at the 50 day line.

This is why I continue to examine this as a new strategy. LFT could've been purchased on 4/28 as low as $20.30 - the buy point above the prior high was around $26 - the stock had already advanced 30% before I purchased it! It went on to $28.74 before heading right back to the 50 dma and stopping me out for a loss.

The more I look at leading stocks the more it seems that I could do better trading the moving averages at the line rather than at the new high. Some stocks will certainly fail to hold and stop out, but the others should be good for a 30 to 40% gain rather than the standard 20%. In general 50 day bounces seem to be good for around 10% above the prior high before they run into trouble.

So to summarize this purchase I like the stock pick but think that I can improve my timing. I think I can trade more aggressively around the moving averages and get better results, though there will be a learning curve involved.

A reader made an interesting comment in my last post so I'd like to clarify - I don't intend to stop buying first and second stage breakouts of good stocks. I'm only looking to adjust the method I use to buy on the moving average support purchases.

Continuing Review:(ARST) and (TNDM)

The next stock on my list for review this year was my first purchase of (ARST) on 4/15, followed by addon buys on 4/20.

One interesting note about this trade is that I did not buy the stock on the actual day it cleared a new high on a bounce off the 10 wma - I purchased it several days later after it consolidated gains from the big move. In fact, the stock traded down to $14 for about a week until the 10 dma caught up to it and it made it's next move to $16. Within another two weeks, I had my 20% gain and took profits. In this case that was exactly the right move, as (ARST) pulled all the way back to the mid-thirteens over the following couple of weeks.

So, what can I learn from a winning trade?

Well, for one thing on a closer look the stock never really touched the 10 wma line, I really bought it coming off the 21 dma. Because I bought at a new high instead of near this moving average, I'll look back on this purchase as lucky. In the future I would rather locate my purchases right around the moving average line with a tight stop. I would, in fact, not mind taking several runs at a stock with these tight stops around a moving average line. Three to four sell stops at 2% still keeps me within my 8% maximum loss threshold - it's not ideal but it shouldn't happen often.

Additionally, buying around the moving average should provide a better return if the stock can go on to new highs. I've seen good evidence that leading stocks can be purchased at the 21 dma and held until the stock dips back below this line. This method of gauging support would've allowed for healthy gains in most of this rally's leaders. In fact, as I've said before, I'm starting to view the moving averages as a better target for purchases than the pivot points outlined in the CAN SLIM system - they certainly seem to offer better support. The same is true for a 52 week high or all time high - I love to see a stock break above all prior resistance - this does not always occur with a cup with handle and other patterns.

So while I might've gotten a better price for (ARST), nonetheless it was a sound buy of a strong stock and I took profits at the correct time. This was a successful trade.

My purchase of (TNDM) on 4/17, on the other hand, ended up a 6% loss three days later.

This was a purchase from a bounce off the 50 dma. The stock never quite got to the 50 dma so I most likely could've purchased it crossing the 21 dma at about $23.25. If I'd purchased the stock this way and had my sell stop at 2% below the 21 dma, I would've stopped out with a slight profit. Obviously, if I can change my system so that my losers are profitable that is ideal.

Otherwise, (TNDM) is what I'd classify as a good loser. I bought it at the right time from a true buy point and it was a strong leader. I don't regret the buy as it was within my system.

As I'm thinking through this new method I'm remembering my intense need to be right. I think I need to cut myself off from the possibility of swinging at a stock several times around a moving average (even though I just said above that this could be acceptable). I'm too likely to flail about at some stock I am positive is the next (DELL).

Instead, I'm going to add another rule. If I stop out on a stock, I must take off five days before I can purchase that stock again. I should be able to remove this rule when I have more experience, but for now I think it's a good safety valve.

I also think that I should avoid buying off of a moving average once a stock has closed below it. At that point I'd like to watch for a base to form or for the stock to make a new high before I'll believe it's ready to move again.

I think that's all for now, I need to translate these thoughts into a list of buy rules that I can reference at any time - as I've shown I need to work off of a checklist to keep myself honest with my trading.

Sell Stop:Everything

I've stopped out of everything, I'm 100% cash and I'm back in the penalty box for three weeks.

Might as well quote a friend here:

"you are talking the talk but not walking the walk..."

In short, I made two huge mistakes:

• Ignored my penalty box rule - thought that I knew better than the system and didn't want to miss a move - this rule would've saved me my last 4 failed trades
• Put far too much capital at risk. I've added a spreadsheet to make sure this number never exceeds 3%

Now the question is, will I keep developing a sound system and keep failing to follow it.

Sell Stop:(GMCR), Continued Review - Focus on Impulse and Risk Management

Happy Independence Day to any proud American citizens out there!

Thursday my addon buy for (GMCR) stopped out for a loss. Rather than address this trade specifically, I'll include it from a philosophical standpoint in my continued review of this year's trading. I believe I've been able to filter down to some key points that will further force me to manage my risk better.

First of all, I believe I need to better manage my impulses. This is more difficult and not as obvious as it sounds when it comes to trading. Part of good trading is recognizing when a good stock is making the right move and being willing to buy it at that moment - likewise on the sell side. However, this is a very fine line to walk. I can easily be whipsawed by fluctuations if I misinterpret them as signs of a trend.

Secondly, when I'm buying off a support level like a moving average, I would rather buy close to the moving average with a tight stop than to wait for the high volume move up off the line. Maybe I'll change my mind about this after more time, but from what I've seen this will put the odds more in my favor.

Most importantly of all, I need to manage my risk better. I put too much capital at risk in the market at any given time. When I take several new positions within days of each other, none of them has time to move in the right direction and give me a profit cushion, allowing me to raise my stop loss order. This means I have 5% at risk in several positions, effectively putting 5% of my total portfolio at risk at one time. With margin, this number can get even larger. From this point on, I will have no more than 3% of my capital at risk at any given time. I may eventually lower this number. I will not be able to take new positions until the positions I hold are working - this alone should help me tremendously.

As far as the trade review goes, the next one on the list for me to discuss is just downright embarrassing. This was my attempt to short the S&P 500. Three times.

Once I saw the distribution day early in the new March rally and realized this meant there was a good chance the rally would fail, I stupidly attempted to short the S&P 500. There's not much worth discussing here, I've been investing for only two years and I have absolutely no business shorting the market. This group of trades comprises half of the money I'm negative on the year.

With my next post I'll begin to investigate some trades I might be able to learn more from than this simple and obvious mistake.

New Buy:(STEC), Addon Buy:(GMCR), Mid-Year Review

It looks a bit like I'm trying to trade my way out of a slump. I'm caught a bit between a rock and a hard place. On the one hand, I've over traded, made poor decisions, and lost some money. These factors indicate I should slow down. On the other hand, the rally is working, and leading stocks are acting well and breaking out. This is an excellent opportunity to pick up some stocks that I've been watching for an entry point for weeks. Never bashful, the latter is the approach I adopted. I'm not going to let past failures keep me from buying good stocks at the right time.

My first position in (GMCR) came close to stopping out on Russell Rebalancing day last Friday, but quickly recovered this week. I still haven't seen the volume come in they way I'd like, but the stock seems to be acting well around key support levels. I've been watching it bump up against $60 for about a week, so when it passed through that level I added to my holding. I would like to see the stock make a new high next week when the traders return from vacation.

Additionally, I've been patiently watching (STEC) to see if it would form a high tight flag pattern. It got impatient and broke out today after correcting only a week, and I bought it just above the previous high at $25.33. This stock has as good a technical and fundamental pedigree as anything I've seen. Now it just remains to be seen if that translates into 'monster stock' status.

That's my trading activity today, but I've been giving a great deal of thought to my trading activity this year. I started out quite well, and at this point I'm doing as poorly as the last two years. That is a wakeup call and an indication it's time for me to seriously evaluate what's worked and what hasn't. For the first time I feel I've progressed enough to gain some real value from reviewing the charts of my purchases. In the past that was nearly pointless, because most of the time I was buying crap. This year I've traded fantastic stocks, but more often than not I've timed my buys poorly. It's my goal to further quantify my purchase process in a way that is flexible but successful and repeatable.

At this point, my record on purchases is 2-11-2. With my goal being to hit .500 on my stock picks, I'm a long, long way off. That's fine though - the important thing is to get it right from here, I can't undo history.

Tonight I'll look at my first two purchases, (SNDA) and (TNDM), which I purchased on 3/12 and 3/13 respectively just as the market followed through on this rally.

(SNDA) had broken out from a double bottom pattern prior to the start of the rally on week volume. It reversed the following week all the way back to the 40 wma, where it found support. It rode this line and then the 10 wma right up until the follow through day where it broke out in above average volume, and this is where I bought it. The chart does not show the obvious accumulation that I tend to look for now (think the bars in the ATT wireless adds), but adding up the weeks in the chart the ratio was more toward accumulation than distribution.

(TNDM), on the other hand, did sport obvious accumulation in the chart. The volume soared in the weekly chart as the stock climbed the right side of a well shaped cup base. Like (SNDA), (TNDM) broke out ahead of the follow through day, then consolidated further, and exploded to new highs from the 10 wma on the follow through day.

Both stocks were in strong industry groups at the time of their breakouts, and both proceeded to notch gains of 20% or more before correcting. So why did I sell them for no gain?

Just two days after the follow through day, the market logged a distribution day across all the indices. Historically, this has spelled doom for a new rally 90% of the time. Still gun shy from my prior failures, I played it safe, moved my stop loss orders up, and stopped out of both positions in a couple of days.

Lessons Learned:

• Watching the market is important, but listen to the stock too. Both of these stocks were acting well and probably deserved some room to work.
• Trust the 5% stop loss. If I'm buying the right stocks at the right time in the right market, the 5% stop loss should protect me. I have to be careful moving stops, although I will do so to put it near key support levels when the situation calls for it.
• Don't be afraid to lose money. I should feel fear before buying a stock, not after. I should imagine how I will feel if the position doesn't work out, and if I will regret the purchase. Once I determine it is a sound buy, I should leave the stock alone and let it work (within reason).

All in all these positions were listed as a 'Push' - neither a win or a loss. They went on to be winners, but there was a strong argument for selling at the time that I did. I bought good stocks at the right time and sold for a sound reason, so I consider these fair trades that I do not regret.

I'll get into some trades that I do regret in my next post...