Skip to main content

Money left on the table - a cautionary tale

Yesterday I was stopped out of my position in the ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP).

I managed to obtain an 18% gain on the trade in FXP but this is actually a pretty lousy result because there were other opportunities to sell at a much better price. Why didn't I? Because I ignored my rules for trading.

Trading is not like buying and holding for the long term. Nevertheless, both types of investing should be pursued with a set of rules, a discipline if you will, that guides your decisions. The rules may be different in these two cases but you should define your rules and stick with them. Unless, of course, they seem to get you into trouble on a regular basis in which case perhaps they should be revised.

First, let's talk a little about the rules I try to follow. They're pretty simple and not particularly original but they are what I use. Here they are:

Stops should be employed at all times. Support and resistance levels should be looked at in order to determine stops. Also look at trend lines and moving averages. Stops should be re-evaluated and updated as a stock moves up.

Stops must be really wide for Ultra ETFs.

Don't chase performance.

You must have an exit strategy when you initiate a trade. The exit strategy must always take into consideration what kind of gain is reasonable for a trade as opposed to a long-term buy-and-hold. Stops or trailing stops should be part of the exit strategy. Put some time into getting familiar with the stock's chart.

Avoid buying or selling in the first hour of trading. Sometimes, when economic data is released before the opening bell, this rule can be broken but only if you are confident the data will support one-way trading that day.

Look at over-bought and over-sold indicators (RSI, Bollinger Bands) when looking to time a trade. This goes back to the rule about not chasing performance. Be patient!

So what rules did I break with the FXP trade?

To begin with, I ignored my exit strategy. Since FXP is basically the double inverse of the iShares FTSE/Xinhua China 25 ETF (FXI), it seems reasonable to track FXI when trying to determine expected moves in FXP. In looking at FXI, I identified several support levels. I waited patiently for FXI to violate one more support level at around $140 and drop down to the next level below. I had decided that at that point, it would be time to sell FXP. As FXI began to move in the expected direction, I needed to answer some questions to validate my exit strategy: Was there a chance FXI would break down below this new lower support? Was my gain on the FXP trade at this point good enough? Would holding on for the next leg down in FXI be too risky and jeopardize my hard earned profits?

The correct answer would have been that current profits were good enough. FXI had already fallen over 30% from its peak and the easy money had been made on the short side. Accordingly, FXP had hit a new high and the profit on my trade, having opened the position at $86, would have been in the neighborhood of 30% to 35%. That was a reasonable gain. In order to preserve this gain, this would have been the time to tighten stops. Which leads me to the next rule that I broke.

It's true I had a wide stop in place but I had not re-evaluated it as FXP surged upward. When the markets began to bounce off their recent lows last week, FXP fell fast and hard. Now I was in a position where I was worried about preserving some kind of profit. This is when I was stopped out of the position.

So the moral of the story is that you must be willing to put in the effort to maintain a discipline or you should avoid trading for the short-term. As for myself, I hope I have learned a lesson from this experience.

Postscript: So this morning I saw an opportunity for a quick trade in the ProShares UltraShort Financials ETF (SKF). There were a number of news items that I knew would affect the financials: downgrades, estimates of further writedowns, slashed earnings estimates, the Clear Channel deal falling apart and the bad Durable Goods report. SKF had fallen right down to its trend line. I bought just after the open at $107. The ETF closed at $110.98.

So did I follow my own rules? The ETF was certainly not over-bought, so that was good. It looked like it couldn't be any lower and still be a buy. I did buy at the open instead of waiting but, given the news, it seemed the day's trade would go in a consistent down direction. My exit strategy is more conservative than it has been in the past with this ETF. Instead of expecting the ETF to rise to the $140 level again, I intend to tighten stops considerably as the ETF gets to the $120 level. We'll see how this plays out.

Comments

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…

Alert HQ has moved!

End of an era!

This site was started way back in 2006/2007 to showcase my blog posts and the Alert HQ buy signals and sell signals. Alert HQ grew to include other kinds of stock alerts including Swing Signals, Trend Busters, Trend Leaders, Cash Flow Kings and more.

In the meantime, I built a sister site, TradingStockAlerts.com and I started using some of the same Alert HQ content over there. As a result, I am discontinuing the Alert HQ data here at Trade-Radar.com

The good news, however, is that all the Alert HQ signals and stock screens are still completely free. In addition, the pages have been enhanced so that you can hover over a stock symbol and a small chart will pop up so you can get a quick look at the stock's recent price action. If you click on a symbol it will take you to a page with plenty of financial and technical analysis information (still free!) as well as a larger chart that you can play with in terms of adding or deleting indicators, moving averages, etc.

Click …