The recent rally has been very profitable, I hope you have experienced it as well. But as they say "stocks take the stairs up, and the elevator down". The past few weeks displayed this action perfectly.
As is always the problem, traders want to avoid "profit givebacks" like we saw Friday. Everything is going along great and then wham. All that you worked for over the last several weeks is halved in a day. Now there is no magic way to deal with this and some are better at it than others. The fact is that it will happen over and over again, this we need to be able to handle.
As a trend trader I have grown quite used to the idea of giving back some gains at the end of a move. Note that I didn't say "I like giving back gains" but rather it happens all the time and it's a fact of life. No one (well almost no one) can consistently exit at the exact tops and bottoms.
However I have found that success doesn't hinge on how much profit I give back, but rather the limiting of losses. If you keep losses small (really small) the amount you lose at the end of a strong move will not dictate your P&L.
The basic premise is be absolutely ruthless with positions showing losses and run the rest. Most of the remaining trades will stop out for modest gains, but a couple will be big winners that end up making your system very profitable. Let's take a look.
I'd like to review the action going back toward the 20th of May and evaluate my current holdings that either survived or were stopped out in Friday's volatility.
Closed Positions
Coming into Wednesday I had a nearly full portfolio. Which was great, right? But I noticed something funny with one of my holdings on Wednesday:
SWN (+15%)
I entered the stock when it broke through base resistance at 12.60 on 5/25. As per my rules I trimmed 1/3 of the holding after a 20% gain in the position on 6/6 at 15.19. The stock had maintained a steady trend of higher highs and higher lows since its initial breakout. Then Wednesday morning I noticed the stock was trading weakly while the SP500 was making higher highs. SWN proceeded to tank -7% on the day and closed on the lows. I had trailed stops to the 6/3 swing low at 14.29 which was broken with zero defense from buyers.
Fast forward to Friday and we can see where the stock ended up:
Granted SWN rallied 6% Thursday (yes I felt like an ass watching it rip), but it then proceeded to implode in Friday's weakness by -11% and closed nearly $1 lower than our original exit. Chalk one up for sticking to the plan!
On Wednesday I also entered a new breakout in CNX which immediately reversed against the entry and we were stopped at the close of that same day:
CNX (-4.99%)
While its never pleasant to have a new trade face plant immediately, it can be a strong signal that something is changing under the surface. As you can see following our exit at 15.06 the stock proceeded to drop another -11% in two trading days. Another High Five to keeping losses small!
It turned out this "hint" of weakness Wednesday was a precursor to a profit taking spree for the rest of the week.
A big winner over the past couple weeks stopped out Friday as well. Just as SWN and CNX were a precursor to future weakness, TBPH tipped off the recent rally on 5/20 as the market set a "bear trap" reversal.
TBPH (+16%)
We entered the base breakout on 5/20 at 19.71. On 6/2 we captured 20% upside, as well as retested the prior highs and therefore removed 1/3 of the holding. The next 6 trading days the stock moved sideways and then failed to hold above prior support Friday, signaling our exit.
The next two losses were completely avoidable on my part:
TTS (-4.74%)
It appeared TTS was staging a solid base breakout on Wednesday (see "buying into profit taking" above) but then gained no traction and Friday's reversal squashed any upward momentum that may have been remaining. Take the lump, the lesson, and move on.
SHW (-1.15%)
Sherwin was another late breakout in an overbought market. It proceeded to immediately drop below our entry point and Friday followed through lower, stopping us out. The loss was very small in this one which I like. While it could still be a viable setup candidate I stick to the rule I learned from Peter Brandt: close any trade that is not profitable at the end of the week. SHW qualifies as that currently.
Note: I only apply this rule to short-term trading. I remain a SHW Bull long-term and do hold positions in the stock based on the larger timeframes.
FANG (+1.5%)
FANG is a great example of giving back gains in a winning trade. Right out of the gate the stock rallied. We entered on 5/24 at $88.15 and within the week it was trading at $94. We then sat patiently through a consolidation, which was then followed by another rip. This new high allowed us a good place to trail stops to and run a potentially very profitable trade.
Following the strong rally on 6/7, 6/8 popped higher from the open but then traded lower the rest of the day. That reversal (on Wednesday again) was the first sign something might be up. Thursday consolidated for most of the day but then moved lower to finish out. Of course Friday was a non-stop skid to fill the open gap and close below prior support.
When all was said and done we closed out for about $1 per share. This is a tough one because you want to let a winner run as far as possible, but at the same time it sucks to watch open profits vanish like that. If there was an easy way to remedy this I would like to hear it. I've tested taking gains at 5% intervals, 10% and so on. But if you get a very good trend, a trend that can make your month, by the time you accumulate a substantial % gain the holding has been reduced 3 times or more and it barely is enough to matter. You need those few large trends to pay for all the small losses. By constantly culling your winners its impossible to snag those larger trades.
The fact is being a trend trader you have to live with moves like this, they happen more often than not. Where the big gains are recorded are in the select few that really move. Keep initial losses small, and let the rest run. Its the best we can do.
Open Positions (currently 50% Long exposure)
MKTX
Open gain +6.33%
UNP
Open gain +6.03%
ABMD
Open gain +4.7%
HAIN
Open gain +3.1%
I'm always happy to be more flexible with open profits; play with open gains, ruthlessly cut losses to principle capital. Technically I could have closed both ABMD and HAIN Friday as they made minor lower highs and lower lows over the past two days. But they also both show decent open gains AND have more persistent intermediate-term uptrends intact.
This is where being ruthless with open losses would come into play. Should I be showing a loss in either of these positions I would cut them, no questions asked into the close Friday. But the fact that they are both winners and possess solid swing low support it makes more sense to see if they can become 10-20% winners rather than only marginal winners. If either or both stop out in the next couple days the losses incurred will be practically zero and in fact would still likely show some gain on the trades. But should they hold their intermediate trend and resume higher they could become the next SWN or TBPH to really make a positive impact on the overall P&L.
Successful trading is a process and never ending journey. There will always be mistakes to learn from. If you always stick to the most important rule with uncompromising discipline, profits will follow: "run winners, eliminate losers".
Closed Positions
Coming into Wednesday I had a nearly full portfolio. Which was great, right? But I noticed something funny with one of my holdings on Wednesday:
SWN (+15%)
Fast forward to Friday and we can see where the stock ended up:
On Wednesday I also entered a new breakout in CNX which immediately reversed against the entry and we were stopped at the close of that same day:
CNX (-4.99%)
It turned out this "hint" of weakness Wednesday was a precursor to a profit taking spree for the rest of the week.
A big winner over the past couple weeks stopped out Friday as well. Just as SWN and CNX were a precursor to future weakness, TBPH tipped off the recent rally on 5/20 as the market set a "bear trap" reversal.
TBPH (+16%)
The next two losses were completely avoidable on my part:
TTS (-4.74%)
SHW (-1.15%)
Note: I only apply this rule to short-term trading. I remain a SHW Bull long-term and do hold positions in the stock based on the larger timeframes.
FANG (+1.5%)
Following the strong rally on 6/7, 6/8 popped higher from the open but then traded lower the rest of the day. That reversal (on Wednesday again) was the first sign something might be up. Thursday consolidated for most of the day but then moved lower to finish out. Of course Friday was a non-stop skid to fill the open gap and close below prior support.
When all was said and done we closed out for about $1 per share. This is a tough one because you want to let a winner run as far as possible, but at the same time it sucks to watch open profits vanish like that. If there was an easy way to remedy this I would like to hear it. I've tested taking gains at 5% intervals, 10% and so on. But if you get a very good trend, a trend that can make your month, by the time you accumulate a substantial % gain the holding has been reduced 3 times or more and it barely is enough to matter. You need those few large trends to pay for all the small losses. By constantly culling your winners its impossible to snag those larger trades.
The fact is being a trend trader you have to live with moves like this, they happen more often than not. Where the big gains are recorded are in the select few that really move. Keep initial losses small, and let the rest run. Its the best we can do.
Open Positions (currently 50% Long exposure)
MKTX
UNP
ABMD
HAIN
I'm always happy to be more flexible with open profits; play with open gains, ruthlessly cut losses to principle capital. Technically I could have closed both ABMD and HAIN Friday as they made minor lower highs and lower lows over the past two days. But they also both show decent open gains AND have more persistent intermediate-term uptrends intact.
This is where being ruthless with open losses would come into play. Should I be showing a loss in either of these positions I would cut them, no questions asked into the close Friday. But the fact that they are both winners and possess solid swing low support it makes more sense to see if they can become 10-20% winners rather than only marginal winners. If either or both stop out in the next couple days the losses incurred will be practically zero and in fact would still likely show some gain on the trades. But should they hold their intermediate trend and resume higher they could become the next SWN or TBPH to really make a positive impact on the overall P&L.
Successful trading is a process and never ending journey. There will always be mistakes to learn from. If you always stick to the most important rule with uncompromising discipline, profits will follow: "run winners, eliminate losers".
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