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Confessions Of a Chartist
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by Profit Pilot TG Watkins
Stop loss missed By 0.5%
Cost Me 30%
First, I don’t like to short stocks that are generally in an uptrend. Yes, pullbacks in uptrends can be quite lucrative in a short period of time because of their nature. But they can be challenging to time correctly, they might be shallow and just chop sideways, or they can spring back up sharply into the overall trend again.
When I first started trading, I was pretty aggressive and thought I could trade all the moves. It took me awhile, but I calmed down and learned that just because there is a move doesn’t mean I have to trade it. Then every once in a while, certain market conditions lure me into the short side, thinking the waters are safe.
The results of this particular short trade are like that morning after your 21st birthday, waking up with such a bad hangover that you swear you will never drink again. But we all know that hangover memory will fade, and we will find the excuse to take some shots with those same friends from your birthday. So I tell myself I will never short a stock again, but really, it’s just a matter of time till I do.
It was the end of September, 2019 and the market was declining from a recent double top. I had guided myself and subscribers correctly about the double top being an issue and to be aware of the false move leading up to it. The market had also been in some pretty turbulent seas just a couple months earlier so I thought the down side was going to be relatively strong with the confirmation of the double top.
I was looking for some shorts to take to be in sync with the market and came across RNG on September 25th and 26th. In my world, this looked like a decent short as price rebounded into the underside of the hourly 50 SMA. Therefore, if my entry was wrong, I’d know quickly as price would push up past the 50 SMA. I took the equity-only trade in a couple of my accounts and was rewarded the next day as both RNG and the market pushed down.
I had a moving average target that came out to about a 10% move which was an acceptable reward for the risk. As price went my way, I moved my stop to break-even to make sure that this winner wouldn’t become a loser. Four days later and I am 60% of the way to my target and feeling good as the market has been supporting the downside sentiment.
Then on the 5th day RNG bounced fairly hard to the upside (don’t forget kids, insider trading is against the law), and came close to my short entry point. I didn’t really think too much about it because I had my stop set and part of my trading plan is to not over manage positions if they are working. At the peak of that bounce, price had come within 0.43% of my break-even stop loss.
The next morning, Friday October 4th, RNG gapped up as news came out about them partnering with AVYA. Apparently, this was a good thing and who the heck is AVYA?
I am not a morning trader but I like to be around for the opening so I can see if there is anything I need to be aware of. This was one of those mornings. I typically check my positions premarket so I can get a feel for where they will open and that is when I noticed RNG will open with a 14% gap up against my short position. I had 5 minutes to strategize and weigh my options.
Do I take the automatic stop loss hit at the open?
Will it pop and flop and I can save myself some damage?
Price is opening right at prior resistance, maybe it will fade a bit before continuing up.
What do you do when you are confronted with a surprise judgment call? Apparently you choose to make the worst, most rookie decision, and think you can manage an already bad situation. So I took my stops off (isn’t rule #1 to never remove your stop?) and then chose to watch the RNG price activity for any signs of weakness or resistance (remember, price was right at a prior high) and see if I could reduce the -14% hit to maybe -10%.
Not today, Mister.
RNG shot up another 22% in 15 minutes to a total of 31% against me.
This thing has to pullback somewhere right? Finally, traders started to cash-in and price subsided a bit and I managed to “reduce” my loss to about 23% total. But hey, it wasn’t as bad at 31% right? I tried to look at that silver lining, but I knew I was kidding myself when the best thing to have done was just leave things as-is and take the automatic 14% loss at the open.
I would have gladly taken my 21-year-old hangover at that point in exchange for the stiff loss and rookie decisions I had just made. Losing money is a part of trading and I have no problem accepting that. What really got to me was that I did this to myself despite the RNG/AVYA partnership news.
- May I reiterate that I am extremely reluctant to short just about anything, and yet I did.
- Incredibly, price got to within 0.43% of my stop. I should have placed greater importance on the bounce (insider trading is illegal, right?) and the strength of the bounce and said to myself “this is too risky, just get out” •
- Then I tried to play God and think I could manage my way out of a bad situation. My dad’s words were echoing in my ears: “Your first loss is usually your best loss” and I should have just accepted the initial damage once it was already there with the gap up.
Let me then pass on these lessons to those who have yet to experience them, or to those of us who need continual reminders of the mistakes we all make at any given time.
This is why my subscribers hear me warn about shorting stocks in an uptrend; That if you are going to short something, make sure you aren’t shorting what is really just a pullback because the consequences can be disastrous. There are trades all over the place, and unlike the game Pokémon, you don’t have to catch them all.
“Precise trades without wasting capital on weak stocks or false moves is the Moxie Method.”
– PROFIT PILOT TG WATKINS
Director of Stocks at Simpler Trading
Wondering why a great looking move suddenly reversed course or just stopped working?
In this series, Profit Pilot TG Watkins will show you his method for understanding the way stocks move.
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