Wow, talk about decimation! $FEED was fed to the sharks this morning after an earnings call that OBVIOUSLY didn’t meet expectations (or whatever earnings call are supposed to do — I don’t really believe anything that goes on in them). All I know is that a 68% gain was sliced in half in the blink of an eye.
If anyone needs proof that ANYTHING can happen at ANYTIME in the market, then this is it. Without a doubt you have to be prepared. By looking at the general market. By making sure you are positioned correctly. That no more than 20% of your total equity is any single trade. This things matter. And this is why:
Here was $FEED yesterday:
But this is what happens in the market all the time — and this is what happens when you trade low priced stocks. Still, traders insist in loading up in positions and then crying when they get CRUSHED. Don’t believe me? Go over to Yahoo message boards on an given day and see the numerous suicide threats. Trust me — that’s not the place you want to be. So make sure you CYA (cover your ass).
Anyway, now that that’s out of the way, let’s take a look at what I did right, what I did wrong and what I can change.
WHAT I DID RIGHT
1. Closed 1/2 the position for a 25% gain. Saweet!
2. Raised my stop with new highs. Saweet!
3. Kept position size under 20% of total equity. Saweet!
4. Found a good trade to begin with! Saweet!
WHAT I DID NOT SO RIGHT
1. Paid no attention to upcoming earnings! Laaame! (I don’t trade earnings, but it’s good to know when they’re coming up so I look more closely at technicals. In this case the LOW VOLUME on the recent new highs).
2. Paid no attention to the impending doom of an approaching round number — in this case $2.00. Laaaame!
3. Paid no attention to the nearing 200 period moving average! Laaame!
Well, at least I did one more thing right than I did wrong. Whoop whoop!
HOW I CAN REVISE MY PLAN
The last thing i do is look at things I did wrong and see if there’s a way to revise my plan or a couple tests I can run to see if the criteria would help my bottom line in any way.
1. Should I trade only stocks above their 200 period moving average? I know some scream yes, but I’m not sure the numbers agree. Yet.
2. Should I close all stocks after a 50% gain? Also known as target trading vs. trailing stops. I’ll run a test and let you know.
3. Should I trade only if the general market is feeling the love as well as highlighted by trading over a certain moving average. (Probably)(I’ll run a test and let you know).
All in all, when I lay it out like this, even though the $FEED move caught me by suprise and it sucks to have a gain shredded like that, ultimately you have to know that black swan events do happen, and worst case scenarios also happen — more often than you think. The key is to prepare for them BEFORE you place the trade. Then, when they do happen you simply close and get out.
And move on.