STOP… In The Name of Profits

This is my last post as King of PG this month. I have enjoyed my reign…very dramatic! And we love drama!  Thanks for reading.

I wish to thank @lg for the topic of this post.

 

The question is, “how do you know where to set a stop loss?”

In my last post, I mentioned that I have been rotating my positions, taking profits in some and dropping non-movers in others, but I made no mention about losers.  That is because I drop losers without question. I NEVER hold onto a stock that has more than a 10% loss MAXIMUM, even in my long term account.

I discussed how I size my positions. I feel that position sizing is something  that each trader must explore on a personal level. Only you can determine your own risk profile. Deciding where to place a stop loss goes hand in hand with sizing your positions.  It’s all about risk. How much risk are you willing to take on with each trade? A lot of folks are comfortable with a 1% loss of total portfolio per trade; I prefer a smaller risk, but only you can decide. You should be realistic and safe in your choice. You can place a wider stop on a smaller sized position or take a larger position and place a shorter stop as long as it meshes with your risk profile.

The majority of my posts have been about dealing with emotions and keeping them out of our trade decisions. Ask yourself what amount of loss triggers an emotional response. Your stops should be placed ahead of the answer so that you keep your emotions in check.

First of all, every trade you enter has the potential to be a losing trade. You should never enter a trade if you don’t accept ahead of time that it may not work. There is no “sure thing” when it comes to trading. This is extremely important because it will help you to keep from “marrying” a trade. They don’t make very good spouses anyway…fickle.

Once you accept that ANY trade you enter can go the wrong way, you will not feel personally dejected when it does. You will simply drop it and move on.

When determining your stop loss, you will also want to consider how long you wish to hold the trade. You will likely want a shorter stop on a day trade versus a swing trade and you may place a wider stop in a long term investment.  In my opinion, you should never allow any equity trade, long term or otherwise, to garner more than a 10% loss for psychological reasons. I have said many times that staying in a position that has more than 10% in losses only sets you up for more losses. It is NEVER too late to sell a losing position. If it has lost more than 10% since you bought it, chances are, your thesis no longer holds true. Don’t waste any more time on it. Drop it and redirect that capital to a more probable trade.

If  you are trading options, you have a different risk equation altogether, so we won’t go there today.

The best chart set-up has an obvious stop not too far away from your buy point. You should determine how much you expect to get out of a given trade relative to the amount you are willing to risk.  We have all heard the term Risk/Reward. While it is fine to let your trade run up without a specific target, you should only take a trade that you expect to garner more of a return than what you are risking. Depending on my risk profile for a given trade, I may pick a stop that is an obvious base, or I may choose the low of the day or the previous day.  In a break out trade, I will likely choose the break out point as my stop.

I offer as an example a trade I entered on June 17 with @chessNwine in 12631, $ISRG. Chess highlighted this set up in the chat room and we bought it on the break out for $349 and placed the stop below the obvious base of $337. Risk was a little less than 4% and our gain has thus far been over 6% and it is still going. (My position was actually in options and I took a 113% profit on them yesterday, but Chess and other traders in the Pelican room are still riding the momentum.)

Now hind sight is 20/20 and clearly this trade worked. I also offer a couple examples for trades I took today. One is $QTM which I bought when volume came in on this bullish chart. Note there is an obvious base/support level around $3.15. I want to make sure that I place my stop with a little room for dips  as was evident on June 27, and I also want to avoid getting taken out by bots who come around looking for short stops, so in this case, my stop is below $3.10. I paid $3.24 and my target is at least $3.60.  This gives me a risk of a bit less than 5% loss on the trade; I expect a reward over 10% if it goes.

I also picked up $BEE as it broke out of an ascending triangle. I paid $7.05. My stop is under $6.95 because that is where the break out started. This is a very short stop for a swing trade. In most cases, I will not recommend a stop on a swing that is less than 2% as it can be easy to get nickel and dimed to death with stops that are too short. But support level is key and in this case, if $BEE drops below $6.95, the break out will have failed along with my thesis for the trade. I can always revisit it if it breaks out again.

These are the kind of set-ups I buy but there are many different styles of trading. Some traders prefer to buy a stock after the breakout has confirmed its continuation. In this case your stock may have already made a strong move since its breakout and may be further away from that point. Look for an obvious support level whether it is the breakout point or some level above that and size your position smaller for a wider stop, but don’t set it at more than 8%. This will give you leeway to make sure that you don’t take more than that 10% loss I mentioned earlier.

Lastly I will admit that I don’t generally set actual stops, but this is because I sit in front of my screen all day monitoring my trades AND I have the discipline to adamantly drop a position at my “mental” stop loss. This keeps me safe of any bots that may want to take me out.  If you cannot sit in front of your computer and/or if you do not have the discipline to drop a losing trade, it is crucial that you physically set your stops. If I have errands to run or need to leave my post, I set my stops before I leave, but I give them a few cents of extra room to ward off the bots.

Again I wish to thank you refined ladies and gentlemen once more for indulging me. It has been a fun month to be King. Until next time.

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Sometimes it’s the little guy that wins the race.

One of the things I did when I moved to technical analysis from the fundy side was to reduce my position sizes. I was feeling very risk averse and I started out REALLY small.  I have since tweaked my style and my rules and have determined that 7% is the perfect position size for me. I will take partial positions and add to them in many cases. And I like to take some day trades so this leaves some room for those too. AND I just prefer a smaller risk profile….gives me 0.5% potential loss per trade. If I am only 30% invested because I am unsure of market conditions, I would rather that 30% be diversified in 4 or 5 positions versus only 2.

Folks have suggested to me that my position sizes are too small. I feel it is personal and each trader must determine what is right for him/her.
The first thing that comes to mind is that if $SPRD had been a 15% position instead of my 7% position – the loss would have been an entire percent of total portfolio (instead of the .5% that it was)…I have to consider who I am as a person and I size according to what I am comfortable with. That said, if $CONN had been double the size, those gains would have been double too, so I suppose it all comes out in the wash. BUT I don’t size positions according to how much I want in gains, I size based on how much I am willing to lose. I spent some time getting this right, so I am loathe to change it.

The long and short is that I need to be able to check my emotions and I know what size losses trigger an emotional response in me. The one time I changed it was when I was following “Bill”, and it really messed with me, so back to my smaller sizing I did go. This does present one challenge…it is too easy to take too many trades, so I have set a rule to limit myself to no more than 15 positions because more is really difficult to manage, but I have been doing a good job of keeping it under 10 by taking profits or dropping non-movers whenever I take new trades.

I rotated my port yesterday. …took another third off $CONN for +41%. I also sold my very small $CROX +9%, $USAT flat, & $FTWR +15%..as well as my $ISRG calls for +113% (hat tip to chessNwine in 12631). I picked up $MPEL, $MIPS, $LAVA, calls in $PCLN & $GLUU, but sold half of $GLUU before the end of day for a 10% gain because….it had a 10% gain, so I locked in some profits.

As I approach my final days as King this month, I wish to thank you all for putting up with my rants. I have enjoyed sharing all my emotional turmoil with you. My last post will be in answer to a special request by @lg regarding placing stops.

Stay tuned.

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I would have taken PRIM today…and I was SO tempted, but after  SPRD spanked me this morning for being too cocky when it gave back all of Friday afternoon’s break-out …and stopped me out, it seemed prudent to wait for more clarity overall. My holdings in FTWR, CONN, USAT – all down today…though I am up 40% in CONN & 7% in FTWR; they are hardly broken;

I am down 1.8% in USAT….bought  with some volume on the 21st and it looked to be following through to the upside but then dropped back down to its longer term trend line today.  If it doesn’t get some movement tomorrow I will likely drop it.

I also have a small CROX position – up 7% and ISRG calls up 40%.
I am less than 30% invested.

And I am still short VXX which didn’t move much today….even with the broad market up.

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It is my job as the writer to communicate whatever it is I want to say. In my previous post, I did not communicate well to some readers. My apologies to the readers who stopped by and read the post out of context of my previous writing.

So let me start by saying…it’s a blog! It is a form of entertainment. As the author, I am putting on a show for you the reader. And that’s it. If what I say is entertaining to you, great; if you learn something about yourself, even better. If it helps you trade better, whoot whoot!

I will not spend the energy to defend myself against incorrect assumptions made in the comments section of my …Swingers…post. I would rather spend my time finding the next great set-up or enjoying my family. I must learn to ignore critical comments as taking them to task only distracts me from the work I should to be doing.  There will always be critics. If readers follow my posts regularly (and especially if they follow my work in the 12631 chat room) those readers will have a better view of my intent. There is no point in responding to criticism but I am happy to answer direct questions.

In response to SPYderCrusher’s questions:

Q. Why were you BUYING stocks in a DOWNTREND for the last 6 of 7 weeks?

I would counter that while it WAS trending down, it did so with significant chop…bouncing up and down through support levels, which gave mixed signals to me and other traders. I chat with other traders throughout the day; we share ideas. The first week was easy…decidedly down and I played good defense.

The next three weeks in May were deceitful. They weren’t decidedly down and they showed bullish signs repeatedly bouncing off of various support levels. It was hard to tell which direction we were going. I wasn’t comfortable swinging short or long. When I accepted the chop and started taking profits earlier, it worked. I adapted to my environment. This was not much of a change from what I normally do. I always lock in profits early in a trade, but unless it is a day trade, I will usually give the set-up a few days to develop. But momentum trades (long or short) were failing in the chop within a day or less. All things being equal, if I take 10 trades with good probable set-ups and I stop out of 7 of them for 5% each and I make 10% on each of the other 3, I am still down 5%. It is my observation that this has been a common occurrence in the chop for some traders.

Q.  What SETUP are you using? WHAT CONSTRUCT guided your decisions to do anything?

I look for stocks with good basing or bull flag charts on the dailies that have some decent volume. I might look for those patterns, put in a bookmark, then buy more when the green volume kicks in….not all breakouts are created equally. I analyze each chart for both upside and downside potential. I want to have an idea of how much I can get out of the stock before I enter the trade and I want to have an idea as to how far it will drop if it goes the wrong way. I set my stops at support levels that I determine usually from previous lows, moving averages or some combination. I don’t want to enter a stock that has a lot of downside risk. I have learned from that mistake already. :~)

If I want a second opinion, I ask Chess or RC, or any one of the other talented traders that I chat with. The best calls are the ones that are not extended and have a clear stop. I use Worden StockFinder to scan charts for volume and other parameters but I have not mastered a good break out “compression” scan using Worden. I am very interested in learning how you create those compression break out screens, Danny. If you would impart your parameters for your scans on Worden, I would be ever so grateful. I will also get many ideas from various PPT screens and chart those.

Q. There are several variations of questions that all surround the idea of me changing my trading style.

I never intended to communicate that I had changed my style, merely adapted it to the current conditions. There is a difference between completely changing your style and changing up a few plays. The mistakes I made when trading with “Bill” were a direct result of me not sticking to my style. Taking profits earlier in a choppy market, was just changing a few plays specific to the team I was playing against. I didn’t go from playing quarterback to playing safety; I had enough of that with “Bill”.

Q. Did  your last strategy stop working, or did you try and force it?

Well, to be honest, I probably forced it. I need to figure out how to bench myself when the environment warrants it. Perhaps if I take a closer look at Danny’s work, I will find some answers. After all, “delayed gains are better than losses.” G.S. Seldon

I think that answers most of the questions in Danny’s comment.

Live and learn. ;~)

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AKA: Shopping on 5th with Dad

For Father’s Day, thedaughter and I dragged thedad to NYC for a little shopping. Thegrandmaman had given thedaughter a $100 gift card to Juicy Couture, owned by $LIZ, for her 10th birthday, having confused the name with Justice, a tweenage favorite with discount prices.

We thought a trip to Juicy’s flagship store would offer the most choices for us to peruse. Thedad, being the consummate analyst, was eager to go in order to observe the retail market in the face of declining consumer sentiment. So off we went to 5th Avenue in search of fashion and Father’s Day fun.

Juicy Couture is not a style that I seek out. I have always found those velour track suits with the Juicy logo on the backside rather tacky. A throwback to the 1970’s with a tramp stamp on the derriere. Yuck! But I checked out ideas for my little girl online before we went and saw some cute things so I was looking forward to finding something nice.

As there was nothing worth noting in the children’s section, it didn’t take long before we were looking at women’s clothes in petite sizes where prices start around $200.

Are you kidding me? Well, we were there, and we had the gift card AND thedaughter had received nearly straight A’s on her report card; she had earned a reward. I told her to choose one dress/skirt…whatever, and I would pay the difference. We chose a few summer dresses to try on.

The sales clerk was very attentive; no doubt she recognized my Dior handbag. She asked thedaughter’s shoe size and returned with a cute pair of $200 plastic bubble sandals that were a size too small, so thedaughter wore the sandals just to try on the dresses. We chose one dress we all really liked and the clerk was clearly disappointed that we were only buying one dress and wouldn’t we also like to buy the sandals to go along.

No, thank you.

Juicy was overpriced; scant customers and pushy sales clerks left us less than impressed. When we dropped into Zara’s, we figured out where Juicy’s customers had gone. Better prices, more variety, and great designs were showing throughout this Spanish discount clothier. We found a great looking shirt for thedad that made a nice Father’s Day gift. I was intrigued to hear the ice cream girl say that Zaras clothes are of lower quality than Juicy’s because they are made in China, (actually the shirt we bought was made in India but the Juicy dress WAS made in China.) Many Americans are quick to assume that cost = quality and this just isn’t the case.

We ventured back out onto the street and a few blocks up found $ANF. If you have never seen this carnival before, the people line up around the corner to go inside while bad cologne and house music waft out the front door as if by bubble machine. We decide to check it out as they have just let a hoard of people into the store and the line had shrunk to just a few stragglers. Of course it wasn’t long before the line behind us had wound its way back around the corner. Thedaughter was beside herself to get inside. Her friends at school told her A&F was the best! Thedad stood there grumbling something about the line being unwarranted. Nobody around us supported him because they all really wanted to be there.

When we were finally granted entrance as if we were being ushered into the Haunted Mansion at Disneyworld, thedad and I stopped short to giggle at the teenage boy with the washboard abs and nipples the size of plates. When you consider that it is clothes, including shirts, they are selling, it is amazing how much nudity goes on here. Thedaughter was already elbow deep in clothes racks by the time we caught up with her. People were shopping here; they stood in line to get in, they stood in line for the dressing room and they stood in line to buy.  I had to admit, the designs were really nice…much more variety than Juicy. I picked up a price tag and was pleasantly surprised to see Zaras prices. And that is how thedaughter got a second new dress on Father’s Day.

While I have banked much coin charting ideas from The Analyst Bomber, his recent short idea on this name does not resonate with me. I will NOT be shorting $ANF….but I might consider shorting $LIZ.
Happy Father’s Day to all the Dad’s out there.

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We often talk about the pitfalls of being stubborn on a trade. Pesky emotions, pesky ego, keeping you from dropping a loser because you have gone and convinced yourself that this stock is worth a billion dollars and you don’t want to admit that you were wrong. Many of us have had to learn this lesson the hard way, multiple times, taking enormous losses over stocks we were sure would go higher. Some even added to their positions as their snowball rolled downhill becoming a larger snowball with a greater loss. But being stubborn can hurt a trader in other ways too. Continuing to trade with a tried and true style that has stopped working in current market conditions can have tragic results.

Swing traders are struggling. If you are a swing trader, you know what I am talking about. The only way you may have avoided this in recent months is to have avoided trading.

You and I are not the only ones having trouble, of course. I just read a note on equity strategy from Citigroup that talks about under-performing equity hedge fund managers who, like the rest of us, are finding it difficult to adapt to a market with no trend. Ideally, we want to find a trend, hop on it and stay on it for several weeks to months, banking egregious amounts of coin, but it simply is not working that way at the moment.

To quote the note, “Fund managers are unhappy. The median global long only equity fund has underperformed this year. The average long/short fund has lost money. It seems that many investors are finding it hard to adapt to trendless markets. Indeed broad stock price indices have largely moved sideways this year, return spreads amongst the sectors and regions have evaporated and price momentum strategies are fading.”

Momentum traders are seeing their positions start out positively only to see them fade within days, hours or even minutes of taking the trade. Many traders are finding themselves dumping losers with 5% losses or more that had started out as winning positions. This brings me to another point, selling is the name of the game. No matter what market you are in, if you can’t figure out when to take profits, you will never make money. Taking a 5% loss on EVERY trade will eventually bleed you dry.

But this is a market that only gives those profits for a day or two and many traders have difficulty changing their style. They don’t want to become…ewwww, gasp, cough, cough…DAY traders. The very thought leaves such distaste in some traders’ mouths that it is akin to being trailer trash. This is the trader who cannot bring himself to take profit within a day of placing a trade.

Unfortunately for us, the analyst who wrote the Citi note does not believe the trendless market will change anytime soon; hopefully he is wrong. But at least he doesn’t expect a continuation the down draft of the past seven weeks saying, “We think investors will have to get used to trendless markets. It is typical at this stage of the cycle, when stock prices Grind Higher with EPS.”

Grind higher? Well there is some good news, if it sticks. It would be nice to at least have a market that grinds higher with EPS. This would definitely be an improvement on seven weeks of dripping lower amidst a lot of indecision. The writer goes on to say that trends can be found in the trendless market and gives his opinion as to what those might be. Finding a trend where one does not exist is no easy task. The current market conditions require the trader to adapt, be nimble … maybe even change his/her style a bit to trade what the market is giving.

The other option is to stay out of the market. This is a perfectly viable option. There are many traders who believe strongly that we should wait for the right market environment. Our old friend Danny, aka: Spyder Crusher, has a market timer to tell him when the environment suits his style or not. This is great as long as you have the time to wait. But it could be a long wait of not just weeks but months at best and years at worst, so the trader must have enough capital to comfortably cover expenses for that long and still survive.

I am not currently in a position to wait that long, so I have to adapt. It took 6 of the last 7 weeks for me to finally figure out how to trade the market we are in, but I had a profitable week on the 7th consecutive down week of 2011, thank goodness, and I did it by adapting and taking profits early.

In this environment, I have decided to take a third to half the position’s profits on the first day…as soon as I have them. Any position that does not give me some profits on the first day, gets dropped before the end of the day. And all swing trades are no bigger than half size giving me a large cash position at the end of each day. Each swing trade gives me SOME profit and I don’t risk turning an initial winner into a complete loser because I have locked some profits in. It’s working….for now.

Each trader can only decide for himself what is the best solution, but one thing I can tell you: if it isn’t working, change it. Face the emotions that plague you and stop being so stubborn. And above all – Good Luck Swingers!

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