Few people will discuss when they get smoked in a stock. Sadly most novices will search the interwebs and only hear of the victorious wins placed by those who never fall on the wrong side of the trade. I’m here to tell you first hand, if you haven’t gotten your butt handed to you by a stock yet, you will, and the longer you trade, the more it will happen. In my career I have seen everything from failed FDA trials, 2ndary slams, accounting errors, government contracts gone awry, fat finger trading errors and everything in between.
Today was one of those days. I have been trading Twitter from the long side for several months now. The bottoming pattern around the Holidays first got me interested in the name and the consolidation after the Q1 earnings gap had me confident in follow through. As earnings approached there was no question I was going to hold something through the number but the only question was, just how many shares.
Typically whenever I’m going to hold something through earnings, something I used to never do but now am forced to since I trade only weekly trends, I will look at the options chains to see what the anticipated move is. While this is certainly not always a guarantee, it’s one way to at least mentally accept the risk should this play out.
Coming into the Twitter earnings, the options were predicting around a 10% move or approximately $5.00. Up until just a few weeks ago I was holding a full position with a healthy profit. With a $5 expected move, I evaluated the risk of losing 10% in this trade vs. the reward of earning 10% on a gap higher. Since I’ve been having a decent year, I had no intention on swinging for the fences, thus I cut 50% of the position over the last couple days deciding to hold half of my shares through the report.
Clearly I was a bit surprised when I ventured over to the computer watching my open P&L jump wildly and noticing that my once healthy profit in TWTR was now flat to lower. Ironically, I did a quick Twitter search to see what was happening and learned all I needed to know.
So now I hold a half position in TWTR shares and have suffered quite a turn of events as the stock has now moved 2x the expected amount. Over the next few days I’m going to have to see when the dust settles if the stock can stabilize at some point and NOT give up the December lows, which was my original area of interest. For now, I view TWTR as dead money unless the stock manages some dramatic recovery in the next few days.
While I believe it can be an excellent longer-term name, the trade I was in is now broken and I must move on in order to start looking for other opportunities. The loss is not anything that will knock me out of the game and the minor ding is just another lesson in remaining humble in a market where anything can happen.
I hope you managed to come away from today unscathed but at some point you won’t. Sometime you’ll get knocked around and it will be all part of the business. Always keep your risk appropriate, leave emotion at the door and live to trade another day.
Trade management is one of the trickiest parts of the business. It is for this reason that any chance I can walk someone through an entire trade, I think it is helpful to do so. It is easy to look forward and develop a plan, it is easy to look back and see where errors were made, it’s difficult to plan the trade, trade the plan and be content with the results, whatever they may be.
My personal trading strategy as laid out in TtT is really quite simple. I take an initial position with a quantified stop. The risk amount becomes my profit target whereby I take a partial gain and raise my stop. My goal is to take partial profits while letting a final piece run as long as it can.
On February 17th I took a position in EBAY on the idea of the stock forming a darvas box and my anticipatory read of a pending break out.
Shortly after my buy the stock acted well and moved out of its range, hitting my first profit target and allowing me to sell 1/3 of my shares.
At this point I raised my stop to break even and watched as the remaining shares languished and the stock traded back to my entry level. While the trading plan was sound my dilemma came into play with two issues. The first was that while the stock was trending back towards my break even and thus my stop, the longer term pattern hadn’t changed and therefore I wasn’t too anxious to rid the shares and move on. The second dilemma was in the fact that earnings were quickly approaching. I suspected that this would be the event to either make or break the chart. If I stayed in and not exercised my stop I would be the only one to blame had the stock reacted poorly on the announcement and thus resulted in a winning trade turning into a losing trade. On the other hand, since the pattern was sound, had the stock reacted positively to the earnings announcement, I would have certainly been kicking myself with being completely out of the name despite the pattern remaining in tact.
I settled on a compromise and rather than shed the entire position at my break even I sold another 1/3 and resolved to hold the remaining position through the report. I accepted the risk, adhered at least in part to my disciplined trading plan and was ready to watch the action.
On the earnings announcement the stock reacted positive and thus far looks like a real break out may be coming. In fact, due to the reaction and even better chart, I took the opportunity to add back another 1/3 to the original position and will keep my stop at my original entry level thus allowing the trading plan to either work out, or again stop me out resulting in a small net gain or wash on the entire trade.
Regardless of what would have happened with earnings I would have written about this trading anatomy as I feel it is a perfect lesson in not only remaining disciplined but flexible enough to adapt when the environment mandates it. I’m pleased with my execution regardless of the current profit or profit potential. I set a plan, followed it, made some small adjustments and remain in the stock.
If the market has shown me one thing over the years it is that humility is the only common thread among traders who find success. If you’re not willing to learn each and every day you may as well throw in the towel now.
Trade ‘em well!Read More
Lately my sleep pattern has stunk. If it isn’t the kids waking up with a cough or a bad dream it’s a mental alarm clock messing with my Zzzzs. This morning it was 3:30 and after reading in bed for about 30 minutes I decided to get up and at least be productive. I thought I’d share with you a few of my longer term, favorite stocks. We hold all of these in client portfolios and have for a long time now however none have run to extremes. In fact, most have just started to get moving. Until charts like these start failing and breaking down, I remain long and bullish in this market.
I’ve been watching URBN since the break a couple weeks ago. Since then the stock has been digesting the move and offering up an opportunity on the small retracement. With such a powerful multi-year break, the chart does not suggest immediate failure but rather a strong new trend upward. Initially, I will use $36 as a stop level but will adjust once I see a reversal and a clear pivot. This will be a long term trend trade.
URBN – $41.95Read More