Monday 27 January 2014

Guest post

From my blogger friend Chartist:

It's Sunday afternoon and I am bored. I open my charts software to find a stock to trade next week. While flipping through my charts i find a perfect Head & shoulders bottom that is about to break out. I make a note of it and decide to buy it upon breakout, risking 1% of my portfolio. I go out see some friends for the rest of the day.

Monday morning and I am ready to take the position only IF the stock breaks out on a closing basis. I take a quick look mid day and decide not to look again until 15 minutes before the close. It almost 20 minutes until the close, I look at the chart and it has broken out Perfect!. I put my order and buy the stock 5 min before the close. I now have a position and I go to sleep.

Its Tuesday morning, I left work early so what should I do?

Yes! Why not check on my stock? Well its not up much on 2 cents..oh well give it some time..

I will look at some news related to the stock. Wow some interesting news that sounds bullish.

I take a look at the sector and most stocks are up YTD nice!

I call a couple of traders to ask their opinion and they compliment me on my position! Great news!

The market closes that day with my stock down 2%, very close to my stop loss.

Now what? I am very confident in my stock news/technicals/friends/sector all in my favor, I will lower my stop loss and risk 2% (doubling my initial risk)

It's Wednesday mid day and my stock is down another 1%. Technically, the stock has made a hard retest into the pattern and made it null. But I forget about technical analysis and focus on all the positive news more every other place. I look at Twitter and find others recommending it as a good buy. I check out George Soros portfolio and bingo! he owns the same stock!! I decide to lower my stop again and risk 3% (Triple my initial risk).

By the end of the closing day my stop loss triggered and as a result of over-confidence I successfully managed to triple of my loss and have to deal with all the negative emotions for the next week or two.

So what happened here? Although I selected and assessed my trade through technical analysis, I managed the trade emotionally and through outside forces such as peers/news/traders I dont know all of which are considered noise.

Moral: Don't get under the illusion that more information = accuracy. You will never have all info, and even if you did, you will never analyze it correctly and even if you did interpret it correctly, you will never know the market reaction!

The Art Of Chart
Charts & more at http://theartofchart.wordpress.com

9 comments :

  1. Fantastic post. Done this far too many times. Less is definitely more.

    ReplyDelete
  2. Thanks Rodders. Did you like the guest post or the blog in general?

    ReplyDelete
  3. this might be why! http://www.infowars.com/china-cash-transfer-hoax-plays-into-bank-run-fears/

    ReplyDelete
  4. it was not easy to find but margin debt for December went up a gigantic 21b to 445b.Extremely bullish in spite of this current pullback.I will add money to the market and cross my fingers...lol

    ReplyDelete
  5. Wow that's significant. The technical picture is looking bleak but the markets have defied every bleak outlook since 5 years. Why not this one? We shall see in 3-4 weeks time.

    ReplyDelete
  6. I think the way stocks were going up in December(with no one needing to do any tax loss selling)the speculation was rampant and the margin debt increase predictable...now with January starting off poorly,this months numbers(released in late February)might show a pullback--especially if knowledgable people decide a bad January is a precursor to the whole year and decide to cut back on speculation.If true and January decreases...then the top in the market could be March or April.Cheers.

    ReplyDelete
  7. As it turns out, higher margin debt doesn't guarantee higher prices.

    ReplyDelete