Hi Mike,
I haven’t hit you up for a trading question in awhile, hoping you have a couple minutes to share your thoughts on a trading issue I’m wrestling with. I am trading only 100 share positions, trying to gain consistency in my day to day efforts before increasing size. I’m wondering how you teach your new traders to manage their winning positions when they only trade 100 shares.
For instance, suppose I am shorting a weak stock that is consolidating at its lows, or showing a held offer after a weak bounce. Maybe I short just below the level, say $50 for instance, with up to a point of potential reward. I enter when I feel like my risk can be limited to .06-.08. If I were trading a larger position and the trade began to work I might cover a little at the first sign of buying, maybe 49.80 for instance, to cover my risk. I might then cover some more into a strong move down, and maybe hold the rest as a core position until there was a strong reason to cover.
Obviously with 100 shares it is an all or nothing proposition. Suppose with 100 shares I watch the buying at 49.80, and the level fails, and the stock moves to 49.60 where buyers reappear. The stock bounces back toward 49.80, but not with such momentum that I feel something about this trade has fundamentally changed. I expect that 49.80 should serve as resistance now, and I want to be true to my trade idea and stay short this stock until it can hold a 49.80 bid again. This would respect what I’m seeing on the tape and the overall trend. However . . .
If this is my plan and the stock does hold 49.80, I am probably covering .82-.85 with slippage. I make around .15 on the trade. At one point though this trade was .40 in the money. So from the the point where the stock was at 49.60 I am risking .25 to make .60. Not the type of risk reward I would necessarily pursue. I could just trail the position the whole way down with a .10 -.15 stop, but that might not be enough room, and it would be arbitrary, not respecting the action I am seeing on the tape which should dictate my decision making.
I try to judge all my trades based on the quality of the setup I took, how well I read the tape, and how well I followed my plan. However, from a P&L perspective I feel like $75-100 is a pretty good day for me. Thus allowing .25 of profit to go against me represents a quarter to a third of my daily goal.
How do you teach your traders at the 100 share level to manage their positions, and how might this differ from how traders using more shares manage theirs?
Bella
Well, there is a lot of good here with your trading and thinking. And there is some you aint looking at the trade the right way. Let’s discuss the later as that is always more entertaining and educational.
If you are in a Trade2Hold then YOU must develop a Reason2Cover. YOU must develop the parameters from when YOU will cover. I was just asked this question by an SMB Trader during our 11AM Open Recap. We meet at this time to go over the patterns that they ought to master after most opens. I have to say I feel like I am asked this question every week by one of my traders. No matter how many times I explain the exit I still get the same question the following week. This is probably because I do not answer the question in full as that would not help the trader. That would tell the trader how I would trade a specific trade but not make the trader better.
I can show you the pattern to trade. I can give you the thought of a Reason2Cover. I can even tell you some of the reasons I cover a Trade2Hold short:
1) long-term technical support
2) new buyer enters
3) the selling pattern dissipates
4) stock reaches my target
5) too steep of a move
6) the intraday downtrend is broken
But now YOU have to go build the skill to trade this pattern. YOU have to develop your rules for this pattern. YOU must internalize this exit in a way that makes sense to YOU.YOU have to think about this trade. YOU need reps trading it live. YOU need to develop nuance to the trade (when to lighten up, add size, cut).
So to answer your question you are not looking at this trade the right way. The emphasis on the give back is misplaced. Did you trade this set up according to your Trade2Hold rules? That is the question. If you did and you gave back open profit, then that’s a good trade. If you didn’t and you made more, then it’s a case of bad trading.
Develop YOUR rules for how you exit that trade. Work on getting better at this pattern. Develop nuance to your rules. And then accept the results.
I hope that helps.
Bella
