Over the past couple weeks I have been reviewing the trades I have taken to show you the thought process of my trading. I often take for granted pattern recognition, but I recognize this process can take a long time and therefore, I want to aid this process with you as best I can.
For this post, we have two trades. One was a loss ($TSLA), the other was a win ($IWM), both of them I followed my rules and ironically – very ironically – had I not followed my rules on both of them, I would have made much more money than I did. But that isn’t the healthy way of thinking; we do not know which stocks are going to win and which are going to lose and why; therefore, we should follow our rules accordingly; patiently and consistently.
$TSLA (Tesla), a loss:
Above is the 5 minute chart for TSLA on 12/16/15. This is the chart I saw when I purchased the stock. The reasons were;
- it was strong all day
- it was consolidating
- it had formed a tight pattern
- it just closed on the highs of the time period (5 minute)
- there was clear risk / reward level (below the recent’s candle’s lows
- the market was strong
All of these reasons contributed enough to convince me to take the trade. I entered the day trade and began to watch. Quickly the stock didn’t do what I thought it would, it came all the way down and stopped me out. However, this wasn’t the end. After it stopped me out (went down another dollar after that), it traded 4+ dollars higher than my buy price (see below). This was a tough trade to swallow the loss in, because in the end the stock did what I thought it would, but not when I thought it would. The take away for me when trading this type of stock (the very lose, wide bid-ask spread type), is to take a step-back and consider the relative higher risk associated with this type trade. Quickly the stock could have gapped down on the intraday level and took me out at a level much below my desired stop level, therefore, I should likely account for this when deciding whether or not to take the trade. In general, going forward, I will likely not take trade in this type of high-beta stock or if I do, I will use a much wider stop level.
$IWM (Russell 2000), a win:
The second of the trades that I recently took turned out to be a winning trade. However, as I said before, had I not followed my rues, I would have made more money than I did. This is trading though; sometimes rules hurt more than help, but they are always necessary for long term success in this business. This particular trade was a short trade versus the high of the day, here are the reasons it was taken:
- The overall market was weak(er) relative to $IWM (meaning, $SPY & $QQQ were already down a lot)
- $IWM was forming a very tight pattern, like a spring; when it breaks it would provide a large move in one direction or the other
- My bias for the break was lower because of the weakness in the other parts of the market and the reality that the $IWM on the daily chart was trading right into resistance.
- I shorted @ 114.53 with a stop above the high of the day, looking for a trade down to 114.00.
- The target (114.00) was determined because of the coinciding nature of the 5-minute 50 sma and the prior day’s intraday support (see the black line drawn), both of these two areas lining up around a round number of 114.00 provided me enough reason to assign the target to that area as well.
As we can see from the chart below, this is exactly what happened, however it didn’t stop there – but rather traded even lower. This was somewhat frustrating to see, but at the end of the day, I followed my plan and rules “to a tee” and wouldn’t want to break the rules to have the chance of making more money. Going forward, I will attempt to implement a scaling out trade plan, in which I scale out of a stock as it moves in my favor.
If these trade reviews interest you, you can see more of them here:
and as always, if you have any questions, feel free to shoot me an email via this link: CONTACT ME