It’s important to know why you took a trade and why you sold when you did. Without these two things, you will be lost in a sea of confusion in trading. You will lack the necessary solid backdrop to fall back to when times are difficult and you will lack ultimately the consistency of winning. If you want to make money in the market, you need to have a process that you implement consistently. As a result of this, I will show you an example of this via a trade I took this past week.
$APLE came up on my scans last Friday (10/16/15). It came up on my scans because it was holding higher (above the 21ema), showing relative strength (compared to the overall market, $SPY), it was inside a tight consolidation pattern (as evidenced by the BBs) and finally because it was closing on the highs of the day (see chart).
This is a chart of what the stock looked like when I bought it, notice the compressed Bollinger Bands.
All of these four things are outlined in much more detail in my post; The Coghill Flag. The Coghill Flag is a pattern that I almost exclusively trade, it comes in variations, but in general it is the same pattern over and over that I look for to buy/sell.
I set the stop below the 21 ema (near 18.70) and bought at 19.00. With .30 risk associated with this trade, it was well within my desired risk/reward ratio.
The combination of the Coghill Flag pattern plus the sufficient risk/reward ratio, the chart triggered a buy, according to my process.
Monday came and went, the stock broke out higher from the pattern, as expected. I didn’t sell Monday because;
- It was only one day up
- It was hardly outside the BB
- Often momentum continues for multiple days
- The target near 19.75ish was not reached yet
With these four reason running through my head, I held onto the stock for another day. Tuesday came and went and I held, this stock was showing immense relative strength on Tuesday and closed on the highs, again. Now we’re at two days up. Wednesday came and went, $APLE consolidated for much of Wednesday, though still managed to close green. As result of the relative strength and recent consolidation (on Wednesday), I held onto it again over night.
Thursday morning came and the market was strong in the pre-market. I Tweeted I would likely leave with no swings that night, which is exactly what happened. Around mid-day I sold $APLE at 19.59. This was because;
- It was not following through with a lot of strength in the morning despite the market being up
- It was on it’s fourth day up
- It was outside the upper BB
At the end of the day, this trade had .30 risk associated with it and ~.60 reward to go along. This is the type of set-up you would like all your trades to look like, 1:2 risk to reward ratio. Now, Friday morning the stock is down ~2% and trading at about 19.40 (.19 below the sell price), so we know that the reasons we sold yesterday were valid and warranted.
This is a chart of the stock the Friday morning after the sale Thursday, notice the pullback after four days up into the bollinger bands
In summary and the take away from this for all of us is this; know why you take a trade and know why you sell a trade. Without these two components, you will have zero consistency. If you have any questions regarding any thing of this, feel free to shoot me a email!