Wednesday, May 20, 2015

What I Learned From Losing Money on $AVGO

Last week I continued with another post in my series on the importance of monitoring positions.  In this installment, I'm going to break down a recent loser for me and show you what I learned from losing money on $AVGO.

The Backstory

In the past, I've discussed my strict criteria for stock selection and $AVGO actually made it through my gauntlet of must-haves.  This stock was a great candidate in my opinion, especially because it:

  • Was in a defined uptrend channel after the market correction in October 2014
  • Earnings were already out of the way
  • The stock had moved into its buy point zone
  • The market was in a confirmed uptrend  

So I put together a trade plan with a 6.7% profit target and a 3.33% loss thresh hold and then I pulled the trigger on am option trade in early March of 2015.

Why It Went Against Me

Even the best stocks still have risk associated with them.  In this instance, the stock wasn't actually the problem, though.  In late March, institutions started a massive sell off with a number of their holdings.  As a result, the market moved back to uptrend under pressure within just 3 sessions!

I was stopped out at my 3.33% loss thresh hold and thankfully so.  The stock continued its fall that day and ended down 6% by the market close.  What's more, $AVGO went right off the cliff after that and eventually moved down 16% so obviously I made the right call with planning my stop loss in advance of taking the position.

What I Learned From Losing Money on $AVGO

I honestly believe that you can learn more from a loss than you can from a win so I have incorporated a sort of "post mortem" phase with every trade, regardless of the outcome.  When I sat down to document my findings on this trade, here is what became clear to me:

  • My ability to select strong growth stocks wasn't the issue here
  • Fundamentals on this stock were not a contributing factor of the loss
  • Institutional behavior dominated the outcome of this trade
  • Preserving my capital allowed me to re-invest in $SWKS on a 2nd breakout opportunity

In Conclusion

Any time you lose, it's easy to start second guessing your methods but you have to fight that urge and think objectively.  Tweaking your system is a time intensive endeavor so you don't want to pursue that unless it's necessary!  It's critical to back test and let the data drive your decision making process.  

If you think you might need help with documenting your methods or with creating trade journals, please reach out to me at investorspotlight@gmail.com.

Happy Trading!






DISCLAIMER



Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.


The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.


YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A LICENSED PROFESSIONAL. You understand that you are using this Information AT YOUR OWN RISK.