A Bad Trade - What to Learn
I made a bad trade the other day I wanted to review.
[[MTL]]
I got stopped out today at 107. The mistake I made there was anticipating resistance, instead of waiting for confirmation of resistance. To the commenter who said it was “a stupid trade,” I would argue ill conceived, due to not following rules. There was little fundamental consideration.
I could think of many reasons for the trade to work, or not, but the major error was muddying up the setup.
So here are the mistakes I made on this trade:
1.) Fought the trend. The trend was up. Coal and steel are hot, and my “thoughts”on the matter irrelevant. Wait for confirmation before declaring “the end.”
2.) Ignored bullish signals on MTL, which I highlighted in my original note. Was there a bias in my approach? Yes, since I was eager to short before the signal–the biggest mistake.
3.) I, in my note, explain that I am breaking my rules…where did that get me? A $7/sh loss. Fortunately, I didn’t throw all my experience out the window prior to placing this trade as I purposefully limited my risk to just .35% and set a stop for real, not mental. That means my sleeping in today didn’t screw me out of another couple bucks.
[As an aside, I fully deserved that sleep-in]
4.) Traded against myself. I didn’t post it, but I bought this setup at .5% risk on Friday. I purchased on the breakout above that range at $49.88 and sold today at $54.21. Textbook. When you wait for confirmation beautiful things can happen.
While I look at stocks and setups individually, it was definitely wrong to buy one and short the other. ACI had bullish technicals, and MTL had…nothing. If anything a slight bullish bias, but no breakout or breakdown. Had I waited, I would have went long MTL on a $106 breakout, since there was no overhead resistance. At the minimum I wouldn’t have shorted.
This is just more evidence that you MUST methodically apply rules to deal with Mr Market’s madness and when you don’t follow the rules, you get fork-stabbed.
Most of what I messed up amounts to trading basics, and though I would love to hold myself in a higher trading esteem, I made myriad rook mistakes on this one. I am more curious as to what led me to place that trade since I knew going into it it was breaking my rules. As my trading progresses, I find those types of impulsive buys/sells are becoming fewer and farther between, while my good trades like ACI happen more frequently.
Live to fight another day
You aren’t the only one who thought MTL was header lower - I saw many bearish signals including a v-shaped pattern, declining volume with price increase, and a break below the 50 day moving average on a little bit higher volume. I shorted this twice and was stopped out twice. Shorting is much tougher than going long, so I wouldn’t worry about it. You obviously learned something based on this write-up.
February 11th, 2008 at 3:58:30 pmSorry about the “stupid trade” comment. We all make mistakes. I personally had no stake in the company or in the metals space, for that matter. I typically use the IBD formula for determining stocks to focus on and I just remember seeing high on-balance volume in MTL’s consolidation zone in recent days followed by a ultra high volume breakout. The stock happened to have a good fundamental ranking, but the reenforcing notion of strength to 52-wk highs to me was the extremely high relative strength of stocks in the metals and ag spaces. Basically, the trend was and stil is up.
I’ve seen your trades before on IBC. You make great calls along with the Fly. Keep up the good work! Just to set the record straight: this is hands-down the best trading blog on the net.
February 11th, 2008 at 7:34:40 pmYeah, it’s cool, I didn’t take it personally. I just realized how off I was on that trade and thought I should how everyone why it was wrong.
IBC is the best. For that, a karma point.
February 11th, 2008 at 9:17:14 pm