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In Up To My Knees

Have you ever felt like you were doing well with your trades? Well enough to potentially max yourself out? Did it work out for you? My guess is that it probably didn’t. Despite being aware of this in the back of my head, I’ve gone and fallen into the same trap that many of you will have already experienced in the past.

I had a really successful trade at the end of last week, making £150 on WHSmith using my new trading system (or rules). Obviously, I felt that because the trade had worked out so well, the system was well worth exploring some more so I began to try and find shares that fit the system.

I managed to identify a couple of ‘almosts’, and added them to my watchlists. I couldn’t find any clear cut winners and was quite happy to sit out of things until something came up.

Then something came up.

I was having a brief chat with a fellow trader (see his blog here) via my twitter account, and the topic of facebook popped into the conversation.

I’ve never really been a fan of the social networking site anyway and have actually never had a personal facebook account. I was on holiday when they had their IPO and I remember chatting to my wife about how rediculously overvalued it was as we drank tropical fruit juices on the Costa Adeje coast of Tenerife (while baby slept in the sun).

I remember thinking to myself then that shorting it would be the obvious thing to do but hadn’t gotten set up with a trading account at that time.

Anyway, during my conversation with LuckyShares, and after a bit of google news searching for recent discussions on the stock, I came to the conclusion that at a current price of 2005, I was definitely in for the short.

I wasn’t going to stretch myself though, I’m trying to much more disciplined with my money management rules now and felt that the potential downside of the share was enough for me to only stake £1 a point with a 50pt stop.

I’d be happy with 150 pt drop and take around £150 profit.

Anyway, after a day in the trade, the position was up £100 and paper profits were looking good. Then the mental discipline broke down and the greed kicked in.

I opened a second position in facebook at £5 a point this time and after a couple of hours into the next trading session was down £50. I did set a trailing stop on my profitable position though and both positions closed out simultaneously leaving me with only £10 profit.

Foolishly, I jumped in again at £5 a point to ‘make up’ what I’d lost because I was ‘sure’ facebook was going to return to its downward trend and ended up losing £40 on that position too as it climbed back up to my original entry point of 2005.

Not being one to know when to quit (yet), I opened another position on facebook, this time just for £1 with a 50pt stop. I’m waiting for the trading session to start as we speak to find out how this one goes.

The difference this time though is that this entry point feels closer to the entry point that I would have identified with my new trading system, so although I feel slightly emotionally attached to the trade, I also feel justified by the chart too.

Using the Same Method I used to Select my WH Smith Position

Sticking to my rules (almost), I did also manage to find several other positions to enter into yesterday. In fact, I found too many that I may have overstretched myself and my margin so that there is no room. I know that I cannot open any more positions without depositing more money.

I am going to show all the charts below, and in each case, the decision to enter was based on the same factors:

  • A strong trend has existed for more than a month
  • A recent price reaction has occured against the trend
  • Very quick scans of google news support the prevailing trend direction

I entered on the second day of the reaction and this position is currently showing a profit.

Again, I am in this position on the strength of the trend and a recent price reaction. The reaction is taking a few days to shake off but I am confident of a rally. Like CHW, media seems to be an area with a lot of merger/acquisition interest. Google ‘WPP buys’  for evidence

This is the one trade I made that went slightly outside of my rules. The trend wasn’t as strong and in actual fact, on technicals alone, it looked like an upward wave was coming. However, some bad news hit yesterday and I was betting on the slight downward trend to continue. Not a good trade.

Again, not my best trade but there is a fairly strong recent trend (at least 1 month long) and a prominent price reaction. Enough upside potential for me to make a worthwile profit if things go my way.

I’m now out of margin, and can do nothing but wait on these positions to hit their price limits (where I take profits) or their stops (where I take losses).

Currently finding it mentally tough to resist the urge to close positions early as other possible (more profitable) trades appear. Sticking to my guns though.

Not moving until targets are hit or missed and I am definitively right or wrong on each trade.

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