Monday, February 1, 2010

Ever take profits too early?? Try and analyze why

Dear readers, in my post last night, I underlined the reasons why I was expecting a bounce in the markets soon. And boy, was I spectacularly right!! Sorry for the gloating, but you being the kind and attentive readers you are, surely know the kind of weeks I have had the last couple of weeks and forgive me for it.

Did I have the day I could have had? Absolutely no!! Am I pleased though? Yes. Let me explain.

Early in the trading hours, I got out of SWC at 10.42 and AUY at 10.42. I jut realized that I got out of them at the same price! Anyway, SWC is now trading at around 11 and AUY at  10.60. So yeah, I did leave some decent sized gains on the table. There are a couple of reasons I can offer for this. Firstly, my lack of confidence following my poor trading in the last couple of weeks. Due to this lack of confidence, my first impulse became not to have any losses rather than maximize my profits. This mentality is something I have to work on. 

And secondly, this is my trading style!! I do take both my profits and losses quickly. So, you will never see me with outrageous gains or on the brighter side, account blowing losses. I don't try to catch the top while selling. This is just me and this is what I am comfortable with and that's the most important thing I think when it comes to trading - adopt a style that is you,  a style that you are comfortable with, a style that reflects you as a person. How do you come to know which style works best for you? I am afraid that is a trial and error method and when you come across it, you will just know that that is the right way for you.

So, the first reason - getting "scared" of losses when being low on confidence - is something that I will work on and hopefully improve but the second reason is my trading style and I am quite comfortable with it. It worked great for me last year and right now, I see no reason to modify it. But that doesn't mean that I am a perfect trader and don't think about money left on the table once I exit a position. Far from it! One of the disadvantages of being a PhD in a quantitative discipline is that I can do math very easily in my head - I kept on adding the money left on the table :). But I am getting better at it. Earlier, I would try and get back into the position out of frustration and very often buy right at the top. I am sure some of you readers have experienced this. At least now, I try not to let it influence my trading and chase after the stock. 

Now let me present you with a counter example of why this strategy works for me. I shorted MTG at 5.92 after selling SWC seeing the weakness in mortgage insurers and not trusting the general markets. I exited at 5.90, way before my intended stop. Its now trading at 6.33 as I type this. So, as long as my losses are on average smaller than my profits, I back myself to do decently well.

Another stock I bought today was CNLG at 3.52. I exited at 3.70 for over 5% gain in 5 minutes. Its now trading at around 4. You might think of this again as huge profits left on the table but that's where you are wrong. Let me explain why. After I sold, it dropped to below 3.50 and I would have got stopped out anyway. With highly volatile stocks like this, it is smart not to try and catch the entire move, but the meaty part of the move with multiple trades. Unfortunately, I couldnt do that due to the damn Pattern Day Trader Rule!! But that's a post for another day....

That's it from me for now. I will be back sometime tonight analyzing the action in the market today, specially the commodities. And for those of you, who like me, left money on the table today, this post will hopefully make you too sit back and analyze your trades.

Take care and Good Luck trading!

No comments: