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Friday, June 6, 2008

HF deconstruction

OK, so my HF position got sold on the stop today. I had been second guessing my trade on this one since Tuesday. The only thing I could have done at that point was to sell and get out and maybe break even but I chose to lower the stop instead. Down $0.60 per share with commissions.

In my post about Setting Stops I used HF as the example.

It convincingly broke the lower trend line on the way down today. I remember saying "...it looked good. Still does but ...", so as it turned out crawling along the line was not what the price had in mind.


Three quotes from my May 28th post that should have been red flagged by me...but I had already entered the trade and emotions got in the way of clear thinking and I didn't re-read it afterwards. Had I, I might have sold on the 30th or 2nd of June for a small profit.



#1) "I am entering this stock later than I would like"



So, if there is always another trade, as I always say, why did I feel the need to enter this trade at all. I could have...should have...kept looking.



#2) "The last six months is all I have made notes on as it is the most relevant and the most defined trend."



Nothing wrong with that...except if you tie it in with the last but not least by far of the quotes...



#3) "This does look like a very shallow downtrend over the last year."



I should have realized that the "most relevant and the most defined trend" was in fact a downtrend once I zoomed out to the one and two year charts. The moving averages should have clued me in as well.



So, late stage entry against the prevelant trend with no prior gains to back it up and a chance for a profit exit prior to the drop.



DUH!



Lesson



Don't let emotions get in the way. As much as I thought I was analyzing this one right I missed all the signs telling me I was wrong as I was hoping for a nice gain from what looked like a decent setup, as late as it was. Now for the most necessary part...

Would have, Should have, Could have...

Had I been watching this one using my CTP approach I would have short sold April 18th or 21st. Once past the mid May hump I could have followed the price down with a stop until the price drops below the moving averages:

I added two Simple Moving Average lines (SMAs), one at the 10 day average (red wiggler) and one at the 50 day average (blue wiggler). I assume a buy in say, at the $13 mark to make the math easy and to fudge against me a little.

I used the solid purple (pink?) for my stop guide as follows:

#1) Leave the stop above the upper trend boundary until it settles into a down trend, it bounced last time so I might expect it to bounce this time. I should already have some profits to allow me to be a little looser withthe stop as well.

#2) Once the price crosses the 50 SMA it is pretty committed so the stop can track along this steep line which more or less tracks the price down. The stopped profit at the end of #2 would be about $0.70 per share.

#3) A good built in stop line can be the 50 SMA line (blue) so I would track along that next, gives the price room to move. I might use a 30 or 20 SMA line depending on what the chart looks like. The stopped profit at the end of #3 would be about $1.00 per share.

#4) Once the price hits the lower boundary it is time to start tightening the stop closer to the price to maximize profits should the price bounce. I drew the line a little later but I meant it to reflect today's drop through the trend line.

From this point on I would move the stop by following one of the shorter period SMAs (10 or 20) or leave it looser by following the 30 or 50 lines. The shorter lines will be more likely to get hit if the prices jossles around a bit. At this point the profits are already locked in at $1 per share or more so there is some wiggle room.

It may do some bouncing at $10.60 or $10 but if it doesn't then there really isn't any particular bottom. Perhaps this will start a new steeper downtrend with some further CTP opportunities or just bounce back up and sort of continue the current trend...it's possible bu not a chance I was willing to take.

JD.

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