Tuesday, October 27, 2009

Equity Trades: "The Good, The Bad, and the Ugly." - 10.27.09 Technical Play Update

The Good:

I shorted at the top and exited at the current day (10.27.09)

I shorted at the top and exited at the current day (10.27.09)

**sorry no time to go into details



Entry point was around Mid September @ 4.41, Initially went up then down but stayed positive then eventually hit 5.00 October 14th. At this point I knew I had to take profits, but unfortunately I wasn't heavily invested and taking profits would have only produced me a few lunches. I was banking on RSI support at 50 and possible momentum reversal. Though had I been moving lots more capital I would have garnered a much more handsome profit (@ 5.00) worth a few months of rent and then called it quits. Though with some bullish indicators still in tact I decided to maintain.

Unfortunately this was the beginning of my undoing. There are a few things that I neglected:

  • Time Frame and use of indicators of differing time frame (a failure of interpretation on my part).
  • Neglecting macro considerations of the banking sector/earnings season (playing straight technicals actually hurt this time around despite the volatile nature).
  • neglecting lack of volume confirmation (which should have told me to exit at 5).
  • Engaging in risk management fallacy
  • Did not notice failing RSI pattern (weakening RSI)

This trade turned bad past below my break even entry point. At this point RSI 50 support was broken along with any possible in between price support. My risk management fallacy was not adjusting my ATR range and using a 3x ATR stop loss with a 14 day parameter.

Considering my original price target was 5.10 3 ATR clearly would have been above this and thus setting a stop loss so low is pointless. A more meaningful stop loss would have been X ATR below true support (eg 1 or 2 ATR below a 3-5 day parameter ATR).

Though it is valuable to learn from your mistakes: its better to learn from your positives in order to replicate them.

  • entry after 2nd Deviation lower BB touched - waited a few days for indicator confirmation
  • The first half of my trade was conservative while waiting for short term bullish confirmation with decent entry at 4.41.
  • Risk reward ratio was favorable to the upside to 5.10.
  • RSI confirmation

Most of the given bullish evidence was enough for a short term profit. Holding past 5 was a mistake I should have realized due to the developing bearish evidence. Indicators now show that price has room to go further south that will kiss or just bounce off true support. If there is a break of support around the 4.20's, watch the pull back to the upside (recover some losses) and be wary of a resumption of a downward trend.

I will also read adjust my ATR stop loss to a more realistic parameter of 3-5 days to ensure better risk management.


"the ugly"

Lots of conflicting indicators though it seems the bearish picture is gaining more weight... My short term bull may be starting to converge into the long term bear... Though I will wait for the pull back to the upside and go mostly into cash due to high downside risk and time constraints.

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