As traders, we have a mantra: “do not make decisions on emotions, allow no room for fear or greed.” FOMO (fear of missing out) is one of the biggest threats against new traders. I thought for a long time whether I should share this story or not, and I decided that the benefit of the lessons learned outweighs the pain and embarrassment of re-living that catastrophic loss again. So buckle-up, sit back and read carefully, you might just save yourself 15 grand!
On 11/19/2020 Titan Pharma for whatever reason had a 34% surge. The next day, (you see where I’m going with this?) the price opened well above the previous highs. At just $0.25, it looks too good to let pass. Taking nothing else into consideration but the fear of missing out on a once-in-a-life time chance, I scoop up about 26,000 shares and waited for the stock to go up. As the 5 minute charts progress, the price begins falling.
Instead of analyzing what was really going on, I only thought about how much I could make if it went above $1.00, so I added 40,000 more shares on the “dip“, then again, and again until eventually the “dip buying” got me holding up around 80k shares.
As it turns out, for the next 7 days, this “dip” went on unstopped and a week after I first made the trade, the stock went on to have a reverse split. By the end of the second week, the stock had loss over 120% of its gains.
So, what did I learn and how can you avoid these mistakes?
- Mind the Trend
- Don’t Fall In Love
- Set Expectations & Be Ready To Let Go
Our first encounter always tends to be full of blind-spots and myopic exhilarations, and it’s not that you cannot see, it’s just that you tend to overlook the trends and the past when you’re into the present moment. Trading is about predicting the future! The number one tool you have going for you in this endeavor is past trends and patterns. Take a look at the chart below on the left for Titan Pharma
Mind The Trend
This is the chart on the day which I made the trade. The vertical line indicates the day (11/20/2020) on which I made my first purchase. As you can see, there is not an established trend. Of course, within the last 7 days prior, you see that it appears to be going upward. But that is not! Let me repeat, 7 days is not a trend!
I failed to zoom out and take a look at the bigger picture. The bigger picture would trigger an important principle to help enforce the discipline against buying on emotion, that is: only go long on an uptrend. Go short on a downtrend. In other words, don’t buy on downtrend, and don’t sell on an uptrend.
Don’t Fall In Love
Every time you’re forced to hold back and stall because you lose your buying power, you are losing very important opportunities, and opportunity costs are tremendously expensive in trading. Don’t think for one moment that “it”, or “things” will work out. There thousands of stocks to choose from, trading is a high-speed game, and love have no place in this game. Save your love for your long-term investments! I’ll have another post on investments, so make sure you subscribe to this blog, unless you want to miss out on that post!
Set Expectations and Be Ready To Let Go
Entering a trade without an exit strategy is as good as flushing money down the drain. It’s not good enough to just considered the trends and committing to a data-driven approach to making your trades. You must also define your expectations up front. Calculating the risks and deciding what is a good entry and exit point. These two elements must always be set when you enter a trade.
Some traders go by a 1:2 risk to reward ratio, others go for a 1:5, whatever your strategy keep it consistent. Not only could I have avoided the big loss, but I could also come out with a few bucks of profit from the trade if I had made use of this strategy. There are several tools that trading brokers have at your disposal to help with this. Stop limit, and trailing stop-loss are two common and important strategies you can use.
With a stop limit, a percent or an exact amount could be set as to when to sell against a loss – for example, if the stock drops by 1% from the purchase price. Similarly, you can set an amount or percentage for when to sell when a price goes up, say for example, when it is 2% or 5% of the original purchase price.
Trailing stop loss is an important tool to have in your utility belt as a trader. The benefit of trailing stop-loss over the limit stop loss is the ability to maximize your profits by increasing your exit point based on the highest price. In a regular stop-limit, a set at 1% remains at 1% the original price, whereas a trailing stop limit will pivot the 1% to the constant changing price of the stock. If the stock goes up from $.25 to $10, it becomes 1% of $10 instead of $0.25. That’s a difference of selling at $9.90 vs selling at $0.2475.
If you skipped everything so far, you missed out on the entire lesson. So here’s the key theme once again:
- Mind the Trend
- Look at past behaviors and patterns
- Do not sell on an uptrend
- Do not buy on a downtrend
- Look at past behaviors and patterns
- Don’t Fall In Love
- Use the right strategy for the right goal (trading vs investment)
- Bag holding is expensive opportunity cost
- Set Expectations & Be Ready To Let Go
- Identify trading points with an entry and exit strategy
- Use stop limits and trailing stop-loss
Also, don’t forget to check out my book recommendations below!
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