Thursday, December 05, 2013

The most profitable trade of the year

Below is the chart covering my trade in Phoenix Solar, a German stock. The position was initiated in early July when price moved out of a prolonged base, and was finally closed this Monday, when the stock slightly gapped down through the stop level.

Along the way, partial profits were taken in early November, when the open risk had significantly increased (refer here for more). This coincided with being a couple of days prior to the most recent earnings release. The end result was that this one trade generated a profit more than 26 times the initial risk, by far the most profitable position this year.

The eagle-eyed amongst you may notice that, on a couple of occasions, it looks like price pierced the trailing stop on an intra-day basis earlier in the trend - why was the stop not triggered? Good question. When using spreadbetting or CFDs to trade the bid/ask spreads tend to be a bit wider than when buying the stock outright, therefore the spread is factored into your actual trailing stop placement. Doing this kept us in the trade.

The other point to note is that, once the trend was over, price has continued to fall. Had we developed an emotional attachment to the stock, and overriden the stop signal, then we would now be losing more of our hard-earned profits.

The pleasing thing about this particular trade was that this had everything a trend follower should adhere to:
  • Having the patience to wait for a breakout signifying a possible new trend;
  • Having the discipline to place the trailing stop in accordance with the system rules;
  • Resisting the temptation to close the position too early (particularly in late July), for fear of losing profits;
  • Being comfortable with the fact that we would not get out at the top of the move, meaning we were able to let the trend play itself out;
  • By not getting emotionally attached to a profitable position, and ensuring the trailing stop was not overriden when an exit signal was finally given.
This one trade has covered a whole bunch of small losing trades, and helped boost the overall returns achieved. One of the traders in the mentoring programme also took this trade, and obtained an identical result. He was able to stay in the trade as he has developed his skills and mindset over time to remain disciplined and stick to the system rules. No surprise to me, as he is the trader I talked about here.

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