Friday, July 31, 2015

A couple of missed trades

NOTE: This post has been updated below following today's price action.

Although I have not been in the markets recently, it hasn't been totally as a result of sitting on my hands. The process of looking out for good setups has continued, and as previously discussed, most of these haven't triggered an entry signal. However, there are a couple of trades that have managed to get away from us, for different reasons:

The first was Novavax, which our scans found a few weeks back when it was setting up. It then broke out, but we did not manage to get in the trade. The reason for simply that the stock bolted out of the gate on the day of the breakout, and moved too fast for us to get in.

Rightly or wrongly, I like to get in as close as possible to the ideal entry level - this helps maximise the potential risk:reward on the position, and I wasn't going to chase the trade. As we can see, the resultant trend progressed nicely before things got a bit choppy in the last few sessions, triggering an exit. The trade would have generated a profit of just over +5R.

The second trade was Ocwen Financial Corp, which we had been waiting for a while to breakout. Again, this finally started to break out this week, but again we did not take the trade. The reason was simply that earnings were released after yesterday's close, and I avoid initiating new positions when earnings are imminent. My primary concern as a trader is to control risk, and with earnings you never whether there could be a price gap against you. This leaves you with the possibility of losing more money than you initially risked on the position.

As it happens, the stock moved up a further 5% in after hours (see below for update). As we know, a breakout just ahead of earnings is no guarantee that earnings will be well received - there was the Bankrate scenario a few weeks back where the stock broke out just prior to earnings and then gapped down.

So, while it is disappointing to potentially miss out on those profits, I was not prepared to take that risk, and I followed my trading plan.


Well, Ocwen may have gone up more than 5% in after-hours trade last night, but today's session has shown a completely different story. As I type this, the stock is down almost 30% from yesterday' close. If I had taken the entry signal earlier this week, and then exited at today's opening price, the trade would have gone from being a small profit to a 2R loss.

This chart is also an example as to why I close my trades on an-intra day basis, rather than wait for an end of day close. The opening price was close to the day's high, so any further drop would have magnified those losses. Yes, in some cases price can try and attempt to close that price gap. But, as I mentioned above, my primary concern is to control risk, and avoid at all costs the possibility of big losses becoming even bigger.

1 comment:

  1. Great article ! Being a solo retired. I just do regret you didn't publish it 20 years ago, maybe it would have helped me to retire in better conditions than I did. Thanks anyway, for others...