One of the most important things to do as a trader is to revisit your past and find errors and successes alike. Finding successful trades allows you to find situations that you can replicate and finding your errors will allow you to find the mistakes to avoid. The following will be a visual representation of one trader’s (not my own) common mistakes.
After going through over a months worth of data I have selected a few trades to highlight this individual’s common mistakes. I have highlighted the trades that will be discussed below.
As you can see, this individual, whether by luck or otherwise, bought FB March15 Puts against the trend line rejection. Based on the options pricing for that day it is my assumption that the puts were bought at the tail end of the day in anticipation of some form of continuation. I have highlighted the date using the pink arrow.
As you can see, the trend was to the downside but it was not as clean and one would hope. Again, based on pricing, I have highlighted the selling point using the blue arrow below.
In the end, this individual was able to close out for a profit.
On the surface, this looks like a “good” trade because this individual was able to collect a profit. However, it is more important to focus on the process rather than the profit.
The trader was able to spot a downtrend, take a short against the trend, and ultimately take a stop for a profit. One problem though, the “downtrend” that the stock was in came after a monster beat quarter that catapulted the stock as much as $21 after the print. So though the trade was “successful” and appeared to be “accurate” on the surface, it was in fact a counter trade which are not nearly as successful.
What I mean by that is that the trader should have been more patient and attempted to buy the breakout of the perceived downtrend for a potential continuation trade. Below you will see these potential breakout points this individual could have played for highlighted by a green arrow and then the support retest and again another breakout potential highlighted in purple.
Just like Monday Morning Quarterbacking, trade revision is always easiest after the fact. So to be fair, I want to give the following context. Personally, I would not have attempted to buy at the green arrow above, nor would I have attempted to buy the retest of the break in trend. The last two purple arrows however would have been my attempt at buying the stock. The first attempt likely would have resulted in a quick stop for me but the second would have more than likely resulted in a quick winner.
The importance of the breakout buy here is the intention to buy the stock with the belief that it will retest the post earnings highs. Given the overall market’s strength, I find that it would a more difficult attempt to fade the stock after a beat than it would be to play for a continuation. These type of details are important in selecting direction. In a weak tape, pops are more likely to get faded. In strong ones, however, the “pain” trade is to the upside.
On 2/12/19 this trader attempted to short the gap up on SPY. Personally, I do not see a particular reason to try to short the market on that date as it broke above the previous range’s resistance and the trade looked more like, both at the time and now, a hopeful one than a prudent one.
When you look back to that trade on the daily, it looks like the individual was trying to short against the 200D. That said, I am of the belief that the market doesn’t give you too long to sell the top and that shorting against the 200D would provide you with a quick resolution. Personally, I’d rather wait for the rejection prior to taking my shot at it, but that is just me. Below is the daily view.
The third trade I want to highlight is this trader’s gap down chase trade.
On Feb 12th TTWO stock opened significantly lower given a downgrade. Below are the notes from that downgrade.
“BMO Capital Market's Gerrick Johnson lowered his recommendation on video game software company Take-Two (TTWO) to an "Underperform" from a "Market Perform" owing to concerns about Red Dead retention. Johnson has concerns that the once strong engagement could lapse and is concerned that the game's ability to monetize to desired levels could come under pressure.”
The important thing that this trader did not account for was the fact that the stock had already been bludgeoned in the previous week — falling from 107 on the 5th to a low of 87 on the 12th.
This individual put on a NFLX short on the 15th of February. I have highlighted the date with a purple arrow below. Once again, there does not appear to be a real trade here beyond a “rejection” of a previous high. Again, personally, I do not try to find topping/bottoming patterns as they have proven to me to be the least reliable trades. I prefer to find the follow through trades. Not surprisingly, the trade did not work out and the individual was stopped out.
I am going to spare you the month of data analysis and instead explain to you that the above was a common occurrence for this individual. Their best trades came on the back of not trying to find bottoms, counter trends, or bottom fishing. The best trades for this individual came on the back of follow throughs and trading against well defined ranges.
One common consistency here with this trader is they are “trying to be a hero”. What I mean by this is that they are trying to find a top/bottom and looking for the reversal. I’m of the belief that they are potentially trying to do this with the belief that they are likely to make more profit doing this (correctly) than trading the ranges they have or by finding better setups.
A second issue that I found was that for the most part this individual was not trading stocks that had any sort of momentum. I found that they were trading “dead money” stocks and just kind of shooting darts. The one instance I highlighted of this trader trading a momentum stock they were attempting to play a reversal which did not bode well.
Part of overall success in trading is trading with he flow and trading stocks that are in trend or that trade in defined ranges. Trading anything else, for the most part, will yield inconclusive results at best. The other thing to keep in mind when it comes to successful trading is focusing on setups and knowing that there will always be another time/day to play. There is no need to feel compelled to force a trade when you can come to terms with the fact that there will always be another day.
These above issues are, of course, universally relevant to most individuals who start trading and more often than not, require the individual to consistently attempt to better themselves and refine the common mistakes made.
Remember, trading is a process. Focus on that process and the results will come.
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