Yesterday I posted my watch list with a note that I was risking only .25%. That post led to the following question:
Losses are part of trading. In fact losing positions make up the majority of many winning trading systems. That is, many winning trading systems have a winning percentage that is less than 50%. It seems counter intuitive that you can be wrong more than you are right and still make significant money in markets. But that truth has been proven by many well known traders.
I’m not sure who created the below cheat sheet but it is worth sharing. If you spend some time studying it, these patterns will begin to jump out at you when you are looking for stocks to add to your watch list.
Since proper risk management can be the difference between a profitable trader and one who goes bust, knowing the area in which to set your stop is critically important and this cheat sheet does a great job of identifying stop areas for you.
The other day I saw the below tweet from fellow trader @LTentarelli
One of my favorite trading books is Trend Following by Michael Covel. In that book Covel describes a hand written note hanging on the wall behind the desk of legendary trader Paul Tudor Jones. The note read, “Losers Average Losers.”
The note was a reminder to Jones not to add to a losing position. I have come to embrace this philosophy as my experience with averaging down has rarely led to profit and almost always had negative impacts on opportunity cost. I have found that when a trade goes against me, the best thing to do is to sell it for a small loss and move on to another idea. Adding to positions that are in a downtrend turn small losses into large losses. With trading, keeping the losses small is key to Risk Management and leads to survival and profitability.
During the trading day on Friday, May 6, trader @wallstjesus reported some bullish “at market” weekly call activity in $HIMX – you can find the report here. Intraday on Friday $HIMX broke established support at $9.95 only to rally into the close with a huge 889,000 share volume spike that regained that critical support level. These events on Friday, combined with recent consolidation in share price caused me to flag $HIMX on the Facebook page before the open today as a stock that was showing some signs of a breakout trade.
The trade triggered today and was confirmed by a 61.5% increase in volume – 4,429,319 shares of $HIMX exchanged hands today vs. 2,741,460 on an average trading day. The stock gained as much as 6.42% on the day before ending the session up 2.72%. It should be noted that $HIMX reports earnings before the open on Thursday, May 12.