When trading stocks using a systematic approach, ultimately the trader utilises a series of discretionary decisions. While we may look for equities exhibiting the same characteristics or set ups, you may end up choosing stock X instead of Y or Z. You may choose to trade US, instead of UK or European equities. You may choose to look solely for long positions, as you feel uncomfortable shorting stocks.
There are additional tweaks to a system that you can make. For example, some traders I have trained or are mentoring make a conscious decision not to open a position if there is an expected earnings release due out within a certain period of time, or refuse to keep existing positions open through earnings, regardless of whether they are in profit.
I also know of traders who totally avoid certain sectors of the market. Biotechs or pharmaceuticals seem to be a popular choice among those. This came to mind after seeing the chart of Pain Therapeutics (see below), which has plunged almost 50% today following some news on one of their products currently in trial. Due to the possibility of huge moves in stock in this sector (in either direction), some traders eliminate the risk of a big loss by avoiding the sector altogether.
In all other aspects this was a great long set up, which broke out convincingly when moving above the mid-March highs, only to lose all that profit and then some following today's news.
Gaps such as this have to be taken into consideration when configuring your risk parameters (again, ultimately a discretionary decision). Gaps, when they occur can be devastating, and can occur at any time.
A lot of traders focus their minds on the potential profits that they can make, not only the potential losses should something like this happen. More reason, if any were needed, to avoid trading too large a position relative to your equity.
actually, that big drop in october was a huge red flag.ReplyDelete
Quite possibly. The point here though is that traders make discretionary decisions all the time, but especially when configuring their system. For example, I made a discretionary decision in 2011 to limit the number of positions I can open on any given day. There are many such decisions that a trader may want to make, determining what maarkets to trade, what their risk approach is, what to do through earnings etc.ReplyDelete