Sunday, February 28, 2010

Anatomy of a trading error...



Timothy Sykes sent a real time alert out Friday afternoon, announcing that he had bought the breakout of MCGC, a stock that had broken through key resistance at 5 on strong volume. Because the stock had tested 5 and failed several times, he felt this long play penetration was a winner.

Since I smartly never buy or sell his real time alerts using actual money unless I had been "expecting" the call and had already researched it in full, using his actions to verify my own opinions, I decided to paper this just for fun. I should have had looked for fun elsewhere, because the stock market is not a place for cheap thrills.

I proceeded to break every rule in the book, and what follows is highly instructive for all aspiring traders!

It is a very good thing that I had the discipline not to play this for real, because the result was not pretty:

A. I chased the stock, trying to get in ASAP, well past a proper entry relative to the technical markers.

B. I did not even look at the chart, buying on the word of an alerter, to get an instant piece of the action.

C. I ignored the steep distance of the stop loss level from my entry, despite knowing the entry point of Tim.

The outcome is that I am now well under water and still hold shares of a play I entered incorrectly to begin with. Adding insult to injury, later in the same session a proper entry presented itself. I instead entered at the exact high of the day! If I had been patient, I could have entered at no worse than the same price as Tim.

Sykes is in at 5.15, which itself is a bit late, considering that the resistance (now support) that was overcome was at 5. But his downside risk is an acceptable  0.25 or so, and mine is nearly double that, and unacceptable! Intraday support on some level existed at 5.15, so the entry was reasonable, if not ideal.

Since the stock did not fall below 5 after I got in, I held it over the weekend. Makes sense as it is an earnings play with news in play over the course of next week. Tim says it could reach 6, but even if it does and I go green on the play, I get a failing grade!

Never chase, never buy blindly without doing due diligence first, and  never disregard stop loss level mathematics, or you will wind up broke and looking stupid... 

BOT    200    MCGC    Stock    5.36    USD    ARCA    FEB 26 13:34:02        1.00


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4 comments:

StocksOn.Blogspot said...

did you just recently update or change your blog...

Michael Goode said...

"I decided to paper this just for fun. I should have had looked for fun elsewhere, because the stock market is not a place for cheap thrills."

Wait so did you paper-trade this or use real-money ... your talk of regret makes it sound like you actually bought it.

Big T said...

StocksOn.Blogspot:

Yes, I have. I am trying to make it more readable, and am trying to install ad/traffic friendly options and am still working on it.

I have installed a pretty expensive web cam with a decent onboard microphone, and have put screencasting and zoom tools into the fray, trying to make vids.

I realize I have a lot to learn about blog info archiving and navigating tools for visitors, so I am asking everyone to bear with me as this process unfolds. In the meantime, I will continue to post my usual articles as I implement a series of changes in site design.

Big T said...

Reaper:

Yes, this particular play was paper, which a lot of my plays are going to be in the near future as I save funds to finance at least 2 other brokerage accounts. I have 26K in IB in a PDT margin account.

I treat all plays the same, even though they obviously are not, in terms of potential consequences.

I feel the process and rules MUST be followed at *all* times.

My posts shows that I did not.

I regret even doing this on paper for "fun" because if I would not have played it as I did for real, the same applies even on paper.

To be fair, lately, I discovered a better use for papering, which is to permit "action" if I fail to find a good play for a very long time, or find myself regretting a missed home run like IFLG (no shares) because then one has a tendency to force trades, and to do so using real funds is quite risky.

Or when I miss several good entries on watchers that I should have taken but dropped the ball on.

I have found almost without exception that either doing nothing (or papering) is best in those types of periods of trading activity...