I've taken just about a month away from posting here while I've tried to regroup. I started writing this blog to improve my trading results, and at a certain point it was doing the opposite - the idea of writing about my failed trades day after day began to lead to more failed trades. Trade review is very useful to an extent, but in a case like mine where I basically derailed, I don't think there was any purpose to beat myself up several dozen times. Instead I stepped back to look at the bigger picture, see the forest rather than the trees, so to speak.
The first thing I recognized, again, is that I'm extremely successful identifying winning stocks. The following is a list of the stocks I have owned at some time this year (some I've owned more than once):
(SNDA)
(TNDM)
(ARST)
(LFT)
(FUQI)
(TSRA)
(PWRD)
(GMCR)
(STEC)
(VIT)
(UTA)
There is no question this is an outstanding list of stocks, representing most of the top leaders of this rally. I'm not bragging, on the contrary I managed to filter down to a list of the best stocks in the market and still lose money! As bad as this is, there's a positive side. I know my problem is WHEN I'm buying stocks, not WHICH stocks I'm buying. That actually gives me a great deal of hope that I can improve my results.
So this is what I focused my review one. I wanted to know in general where my timing was wrong.
- I found that my success rate on breakouts from bases was fine. If I'd only bought breakouts from bases I would've made only a few trades and I believe all of them would've been profitable - two of them massively so. Which brings me to my second realization.
- On base breakouts I need to observe the 20% in three weeks rule. This rule states that if a stock advances 20% in less than three weeks it has the potential to be a big winner, and you should attempt to hold it for eight weeks. If I'd done this, I would've doubled my money on (SNDA) and (FUQI). Which brings me to point three.
- Stick with the 7-8% stop loss rule in most situations. Early in the rally the market gave a very negative sign by logging a distribution day. I moved my stop loss orders up and stopped out of (SNDA) and (TNDM), both of which went on to be winners. In my fear of suffering a loss, I cost myself the kind of gains that make a year for a trader. By not allowing these purchases to work I forced myself to allocate the money elsewhere, often in less successful trades. Which brings me to point four.
- Money is made in the market by sitting and waiting. I will not be successful from making a lot of small winning trades, but from finding big winners and letting them work until they show signs they are not working anymore. This is closely related to point 2, different side of the same coin you could say. The point is that by leaving my capital in a winner, I don't have to risk it in another stock which is an unknown quantity.
- Buys when a stock bounces from the 50 dma are TOUGH. Buying even the best stocks at a new high after they've found support at the 50 dma has just not worked for me in this rally. They've tended to advance around 10% and then retreat. I suspect this is because the support lines are so far below the stocks, which have made rapid advances, that they are 'tired' by the time they make a new high. Whatever the reason, based on my experience I've changed my approach in two ways I'll outline below.
- Once a stock has advanced 10% from the proper buy point, I'll move my stop order to the proper buy point. If a stock advances 10% I don't want it to turn into a loss. Obviously I must buy as close to the proper buy point as possible for full effect here.
- I will buy a stock that has found support at the 50 dma if and when it closes above the 21 dma on 150% average volume or greater. I will buy at the end of the day if the close above the 21 dma is certain, or I'll buy the stock the next morning. I will only look for a 20% gain on bounce buys.
- I will buy a stock that has a breakaway gap up opening to a new high on earnings news with massive volume no matter if there is a pattern or buy point. This setup is highly effective from what I've seen, and is therefore worth buying into. The stop will be 8% or 50 cents below the low of the breakaway gap day - whichever is higher.
To the best I was able to determine reviewing my activity this year, the simple changes above would've produced four 50 dma bounces stopped out at break even, one 50 dma bounce for an 8% loss, two 50 dma bounces for a 20% gain, and two base buys for 90% and 120% gains respectively. Obviously the last two are the trades that would easily have made my year, but what else is important to note is that I would've only had one trade for an 8% loss.
I don't want to overstate the results of a review because it's impossible to revise history. I can apply all these rules to past trades but in the moment it's never that easy. Nonetheless, I must continue to work toward a more mechanical and repeatable method, and I think this is another step toward that end.
I've already applied this to my current portfolio. At this time I own:
(GMCR), (UTA), (PWRD), and (ARST). The first three were bought from bases. (UTA) has qualified as a potential big winner and I have the stop in at $12.70 and otherwise will try to hold the stock until 9/22. (GMCR) and (PWRD) must advance further on Monday to qualify as potential big winners - (PWRD) may do this as it releases earnings on Monday. Otherwise I will target both for a 20% profit. (ARST) was a purchase off the 50 dma and I already have my order in for my 20% profit target. I did own (VIT) which had advanced 10% and then stopped out, no loss as per my new system - nice not to have a 10% gain turn into a 5% loss!!!
Well, that's it for tonight. we'll see what the market has in store for us tomorrow.
Posts
