A reader emailed me in my Street.com account lamenting that he has a habit of selling stocks too early and he gave two examples of nice trades but with a lot left on the table.
First thing would be that regardless of your strategy you will not top tick too many stocks on the way out, it just isn't realistic so you have to deal with that sufficiently so that you don't second guess everything you do. This reader is much more of a trader than I am but it seems to me that if you are interested in short time periods for holding a stock you probably should define an exit point above and below the entry price and then stick to it. If you set an upside target of 20% for two months and you get it, I think you just need to it take, be happy, and move on.
It is possible this person is not a trader but gets shaken out when he gets a big move that goes his way. If so then this person needs to change something but I am not sure what. Maybe when they get the urge to sell in this scenario they should only sell half. The two examples he gave do not lend themselves to stop orders very well, IMO, but that could be an option too.
Realistically over a lengthy time period (maybe not that lengthy) most investors would look back at hopefully a lot stock picks that have done fairly well, some that probably have not done much of anything and few that for one reason or another are down. Some could be down because they are counter strategies of some sort, some could be good holds but in the wrong sector and some could be down for the simple fact you got it wrong.
Having stocks that are down for any of these three reasons is normal. If you have too many that are down there might be a problem. The problem could be stock selection but it also could be the result of big bets in the wrong part of the market. For example anyone who has made a big bet on discretionary stocks this year is probably struggling versus the market.
People get hung up when something goes down which I think is a focus on the wrong thing. If a portfolio has a 10% return in a year, some stocks will do better than the 10% and some will lag. You can't know ahead of time which will be the one that goes up 50% which why a diversified portfolio is a relatively easy path.
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9 comments:
It still can be useful to keep some sort of trade journal to see if you can improve you thought and research processes, I think. Though you can't get them all right, of course, you might be able to spot research voids, or some factors that make better or worse outcomes on average?
Also, Roger, do you have an analysis checklist or procedure you use to select stocks? Like-- 1)sector/region,
2)specific financial ratios,
a.,b., c.etc
3) analysts' forecasts
whatever--anyway what I mean is a semiformal set of factors you use?
I might also recommend a trailing stop loss. If the person finds that after they sell, typically it keeps going straight to the moon, set up a trailing stop to lock in x% of gains, and if it keeps on going, you'll get more. Keep in mind, this is also a fine art. More heartbreak is on the way when you set a stop, it gets hit and then proceeds to blast off. This is unavoidable, and having a plan in place ahead of time is paramount. Find comfort that you've developed a plan and reward yourself for sticking to it. No one will ever correctly get tops and bottoms time after time or even 1% of the time.
Sharon,
I think i addressed= that in the comments on Sunday.
If we're talking about a day trade, Once the stock covers my risk I take partials. Then I bring my stops to even and let it ride.
I use the same methodology with swing and position trades. Like Bill B mentioned the trailing stop is a good idea. Just move it up to certain areas below support as the stock moves higher.
You'll never catch the top(or bottom), but if you're making at least 3 or 4 times your risk, you'll be ok.
I could just kick a puppy some times (just kidding as I love dogs).
It seems like anytime I get stopped out, the stock ends up going in the original direction of my intent. I can't tell you how frustrating this is. Its freakin insane at times.
I feel as if I'm in the movie 'The Matrix'. The trades are so unreal and uncanny that there must be some guy sitting next to me that phones into wall street that I've sold, and now the stock can continue its original direction.
Maybe all this is just my imagination and some day I'll wake up to realize it was a sick dream.
Even if you don't consider yourself a trader I would highly recommend you read and fully comprehend this:
http://bigpicture.typepad.com/comments/files/turtlerules.pdf
...and this:
http://tinyurl.com/27od6d
Try this for the first link:
http://tinyurl.com/o5ggv
thank you Tom
Here's another great strategy for managing risk via stops: http://tinyurl.com/22tren
LeBeau's method sets stops based on a securities volatility (as the Turtle Traders did). My orientation is intermediate term so I use a 75 day ATR and 4.5 trailing ATR stops on ETFs.
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