You Always Sell Too Soon?

One of the most common complaints I hear from traders is that "I can't hold my winners long enough."  I've been there. Here's an amazing 7 point gain that doesn't look so amazing in retrospect:

It's taken me a long time to slay my demon that made me sell stocks for small profits.  Let's face it, selling makes us feel good, then move on to the next and repeat.   The problem is these small gains don't do a whole lot for us.  In any given year, how many of your trades actually impacted your bottom line.  For me it wasn't that many.  Most of my small gains were canceled out by small losses.  It was the few large gains that made my year.  But I saw I wasn't maximizing them.  I was taking partial profits and worse, I was missing huge trends when I had nailed the entry perfectly.

So after much analysis, I realized that I needed to maximize my homeruns.  To paraphrase Soros, its not how often you are wrong or right, its how much you make when your right.  To that end, I need to adjust my approach to allow me to maximize my profits when I got it right.

 It turns out the solution was pretty easy.

Here's the cure.

Stop caring.  Stop caring about making a 8 to  20% gains.   That's noise.  If you are in a winning stock that will make  100% gain or more you have to be willing to let the stock come all the way in.

As Ray Dalio discusses in his "Principles," to be successful, you can't overweight the first order consequences at the expense of the expense of the second and third order consequences.   Yet so often I see people bragging on twitter and stock twits about nailing a 20% gain.   "Congrats to my followers" they say.  -- By all means follow them to mediocrity.

If 20% is good enough to take profits, they will NEVER hit the 100% or more winner that has life changing potential. You can't have it both ways.

When it to Sell Your Stock:

1. Stop loss -  The max amount I'm willing to risk when taking a position on.  
2. Break Event / ITM Stop:  After a stock moves in my favor, I usually move my stop to break even to slightly in the money.   The logic being that If I'm stopped out at this point, it hasn't cost me anything and if the stock re-sets I can take another shot at it without having cut into my equity position. 
3. Failure to obtain an earnings cushion:  Risk management first.  If you don't have 10-20% gains (depending on the stock) you can't take it into earnings.  
4. Market conditions: If leading stocks are getting distributed, it doesn't matter what your stock looks like, get out of the pool.  As Jesse Livermore wrote:

"An old broker once said to me: ‘If I am walking along a railroad track and I see a train coming toward me at sixty miles an hour, do I keep on walking on the ties? Friend, I sidestep. And I do not even pat myself on the back for being so wise and prudent.’"

1. Psychological levels:  buying tends to slow after runs at the major psychological price levels, 50, 100, 150, 200 etc...  If you have gains, this can be a great place to sell into strength.
2. Parabolic Character Change -- when the trend of a stock suddenly accelerates it is often at the end portion of its run.  Sell into the strength:

Abnormal distribution:  If selling hits your stock that is high volume and is out of character get out- ask questions later.

Market Thoughts

Today could be  pretty pivotal day so I wanted to write down some thought to make sense of it all.

I started the day very biased to the long side and had big gains in VRX, AA, TEAM, WTW, and smaller gains in MZOR and TWTR.

My initial trading plan for today was to sell TEAM -- due to earnings and buy one of the best looking breakouts I saw from Friday-- PRGS.

From the onset that market was in rally mode.  I sold my TEAM into the opening prints up another $1.50 from the day before and started hitting my PRGS target.  Then TWTR pulled back to its 5ema and started to bounce so I got really aggressive.

But I noticed something that really concerned me.  SO I sold ALL of my positions.  I am now testing short positions in BABA, NVDA and YY.

Many of the high beta stocks were starting to fade.   Combined with the indexes gapping up after an extended run--exhaustion gap?

Charts.  Follow the leaders.  They are giving us a clear signal to step aside.

And the leaders: (4 hour charts to show gap and fade)

ADBE:

ADSK:

BABA:

NVDA

More speculative beta stocks:

MZOR

NTNX

OSTK:

Ode to the Homerun

Ode to the Home Run

This year I've made the following trading plan to guide me this year.

2018 resolutions: 
A. Possible outcomes for trades (1) small loss; (2) push; (3) huge winner. 

I can't be a home run hitter If I'm content hitting singles so I've taken the small win off the table I am perfectly willing to take a break even trade after I'm up 10 or even 20% on a stock to get a 50% or bigger gain.
B. No partial sales: If I'm in a huge winner, I'm not going to minimize it because I'm insecure in my trade.

Taking partial profits turns a home run into an average trade. The psychological comfort of "locking in" some profits is too costly. Every year only a few trades will account for the vast majority of the return. The other small wins and small losses cancel themselves out or are insignificant so I need to make sure that my big wins make as much money as possible.  
C. Build positions at pullbacks to moving averages.

I need to think differently than everyone else and not be positioned with the crowd. The crowd buys obvious breakouts.
D. Target 100% + moves.

A truly leading stock should be able to at least be able double from its base. If it can't do that, it is an also ran. I will be in leading stocks based on price and volume and I must give them a chance to work.

I recognize that there will be times when I may need to step aside in a stock to manage risk, I will view a re-entry as a continuation of the original position.

E. Aggressively Manage Risk.

There's no point to hit home runs if I give up runs on defense. A break even trade after being up 20% is acceptable. A .01 loss after being up 20% is not. I've had "wins" this year already that other traders would brag about, but I've taken the position off not to lock profit, but to manage risk. For example, not enough cushion for upcoming earnings.

Why I shifted my philosphy and trading plan

2017 was a successful year for me as I posted decent profits mostly from swing trading. I also realized that there were limitations to my approach that would keep me from being a great trader.

The approach I had used in 2017 was to identify strong stocks buy the breakouts using a fishhooksetup or a slingshot (on the pullback and then swing those for gains on) Take profits on the way up.

For example, my most profitable trade (or series of trades, which combined according to my brokerage statements was a 108% return) was in AAOI:

I hit the entry perfectly (Fishhook entry) , added size and phased out. I got tons of "atta boys" from my trading friends which include some of the very best swing traders (guys that are asked to speak at national seminars).  Yes, I made quite a bit of money on this trade, and on the original  position I took at 63 as well that I took another $9 out of but I realized that in some ways this was a terrible approach  for several reasons.

The biggest mistake was I treated this as just another trade.  An AAOI type stock will come around only 4-5 times a year,  had I traded it better, this stock alone should have given me triple digits on the year $30 to 100 in a liquid and holdable stock. But I only had a normal position, which I minimized by selling on the way up with partial sales.

The second problem was I fell victim to my own psychological needs. At the time the position started running, I remember thinking that I was doing a great job because I was up over 10 points and I would usually start selling with a 10% gain and now I'm up 30%+.   This type of thinking is flawed. It was the fear of losing my paper gains that caused me to sell when there was no reason to.

I, like many traders, had (yes I'm using past tense) a problem holding our winners.  For me, it was this need to constantly hit winning trades.  We talk about our win rate, average win, average loss, % of R.  I used to track that shit religiously.  I would sell a stock (like AAOI and some others) simply because the numbers would look really good on my spreadsheet.

You know what looked good on my spreadsheet? A $7 point gain like this:

But the spreadsheet would not reflect how terrible of a trade my $7 point win in TREE was:

Nonetheless, many traders talk about how important it is to hit singles.  Bullshit!

Every baseball fan know that Giancarlo Stanton was the home run champ with 59 homers but who hit the most singles? --  Crickets.  That's because no one gives a shit.  It's the long ball that makes legends. 

So while the singles hitters are going keep celebrating their "wins",  I'm swinging for the fences this year. I'll foul off dozens of pitches in the process, and I won't care.  My defense will be excellent and I'm going to continue crush the damn ball when I get my pitch.. 

I'll let the other guys count their singles, this year I'm tracking only my home runs.

Here's number 1:
I recognize this is a gambling type stock but wow did I like that chart. I sold through the $30 break for a big gain.

Good speculation,

Scot1and