You better check yo self.
I am down on my $CMI position since its purchase. So, how am I supposed to react to it? Do I say, “Oh wow, man. I’m losing money here, man. I’m a total loser, maaaaaaan. Let me smoke some nugs and munch out on Funions and Bugles.”
Answer: No. I do not say that.
$CMI is still a top tier company that makes great, hi-tech engines. Rather than getting all frustrated and emotional about being down on the position, an analysis of the daily chart tells me how I can best define my risk from here. As you can see below, I am willing to admit I am wrong and sell out of the name if the stock falls and holds below $75. If that happens, then the prior breakout earlier this summer can be deemed premature, at a minimum.
Of course, if the prior resistance turns into support now, the stock could easily be setting up for a run to new highs. Thus, having a clear line in the sand is important for not only mitigating your downside risk, but also helps to keep open the possibility of capitalizing on a reversal back to the upside.
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[youtube:http://www.youtube.com/watch?v=AJR62vsAg-0 450 300]r
Many thanks, I must admit that I struggle with this one regularily, although I am not a fan of funions or bugles. While I understand you have identified a stop for THIS stock, what do you do/think if other indicators indicate ‘things’ are rolling over? i.e lets says that on a seasonal basis CMI is down 80% of the time in September by 15% on average? Not that it is, but I am curious how/if you work that into your thesis.
Thanks as always
The PPT info is priceless and I always try to respect it.
I always fuck this sort of shit up. Let’s take the above for an example. I might also set a stop some where below $75 (never use an even number on the dot); we’ll call it 74.30 for shits and giggles. MM guns for my stop and sure enough it gets filled. CMI would then continue down for a little more to say about $73ish. At this point I’m feeling smart because I saved myself a whopping $1.30 per share. Then next thing I know the fucker is printing $85.
Or we can get real cute and use a mental stop. We’ll say a mental stop at 74.30 but we want to make sure it wasn’t a headfake so we make damn sure 74.30 fails. Well before I determine it’s not a head fake and the selling is for real, CMI has plummeted to $70 in what seems like a few seconds. Now I’m in a trade that’s turned into an investment.
That’s why I hate myself.
That’s ok. You will always have a “confirmed kill” to hang your hat on.
Damn right.
po use a hard stop. the point is you WERE wrong.
Here’s how trading works, for me.
I buy at the exact price and time I’m sure I’m right. Anything else but a move striaght in the direction I bet means I was wrong. Thats it.
in your example, you fail bc of poor planning. How long will you hold? whats the target? whats the expected return?
If you bought where chess did, who cares if it goes to 70 then 95? is that what you bet? why cant you get back in when it reclears prior resistance? stop out, jump back in. or stop out and move on bc clearly you expected momo and never got it.
It always seems to happen that way. What I try to do is put in my hard stop to clear me out and if it gets hit and stays below for a period of time, I then put a conditional buy in at my old stop so that if we trade back above it, I am back in again. And then start again, but obviously the stop is much tighter now, and there will be no conditional buyback if it gets hit.
Nugs nugs.
Looking to add CMI ~$75….going to await tomorrows data first.
Knowing my luck, the data will be good and CMI will pop without me on the train.
“Oh wow, man. I’m losing money here, man. I’m a total loser, maaaaaaan. Let me smoke some nugs and munch out on Funions and Bugles.”
hilar.
Chess, I admire your analysis and trade. Have you ever had a time the stock goes back up higher right after you stopped out? It happened to me with $ISLN. But when I don’t use stops, I ended up with ENER and AONE 35% less than what I paid for. How do you tell a drop is lost case?
All the time! It is simply part of the game. There is only so much you can control. If a stock is going to suddenly reverse after it takes out your stop, then so be it. What you CAN control is managing your risk.
I give up stop loss orders because some say computer trading allows others to find your stops to buy them cheap. Do you think that is not true? But you use mental stops not automatic setup, right?
hubbs:
although this is chess’s blog hope he doesn’t mind my 2 cents (i am simply impressed as his posts seem simple but in my view are just very,very “efficient” ). Its true that stop loss will decrease the absolute profitability of the “system” you use but it is a tool to control risk and minimize drawdowns not to maximize returns. And a critical part of the trading plan (which unfortunately not many use) is to include re-entry rules. So have the entry, exit setups and triggers, profit and loss taking setups and triggers but you also always have a re-entry setup! Re-entry rules as well as pyramiding into successful positions is what differentiates very good traders from not so good ones.
Regards,
thanks jt. you are right – i need to learn about re-entry rules. also perhaps a stop order that is less likely being fished out?
mmmm nugs…
I love your blog!