Adding another pick to my hit list, PKI

The funny thing is that I don't even know the name of the company, the joys of pure technical trading as I don't need to know... although I usually end up finding out something about the companies that I trade along the way. I do enter them in a new feed and every month or so I see if anything interesting has happened.

I am in the process of ranking it against my other picks to see where it fits into my current list of active orders. Halloween sort of got in the way of me finishing though. I expect that it will easily end up near the top of my list that I will likely place an order for tomorrow and perhaps even bump another pick out for now.

I am finally getting around to formalizing my rules and guidelines in order to keep any ambiguity out of my trade decisions and management. It's nice to have a firm set of rules but even nicer when I can refer to them to remind me not to try to do something different... I am prone to trying to "tweak on the fly" and that, often as not, keeps me from sticking with a plan for long enough to make the money that it could have.

I plan to add another 6 or so stocks to my list by the end of the week.

Jeff.

CMC trade closed and the next opened

As noted in my Live Trades window the CMC trade closed Wednesday for $1 and $1.50 targets for the two trades which yields a 6.9% and 10% profit.

I have been involved in regular meetings this week so I was not as on the ball as I could have been with the re-entry into this stock. My entry target was $13.50 (long) and I could have gotten in the same day as the short profit target was tagged but I didn't do so until today.

No big deal... unlike the IRM trade that I missed for the sake of an hour, I find that most trade entries, and exits for that matter, have much longer windows of opportunity.

I re-entered CMC long adding the profits from the short trade to compound the trade size.

A brief note on the compounding effect.

Something that I overlooked when trading options, which was ultimately part of my reason for getting out of option trading for now, was the method used to compound returns based on profits. I won't go into the details other than to say that not doing it properly can easily blow up your account due to not being able to change position sizing in gradual increments.

With stocks, compounding will allow gradual increases in absolute risk following every profitable trade and an easy method to downsize trades in order to minimize risk following a loss.

I'll put up some numbers in my next post.

Jeff.

ROI Optimization... Ignoring Time Lines.

Perhaps my post should have been titled, Near Miss with IRM as this was entered on Monday right shortly after missing the $23.00 high in IRM that day, I just forgot to actually post it:

Today I dropped a stock off of my hit list (CLI) due to it's price being higher than my optimum stock price and added one (IRM) that, had I been one hour earlier I would have gotten into a trade.

Actually I would have been in a nice reversal trade on that one as it hit the previous long position target and the next short trade entry this morning.

Due to my fixed target sizes ($1.50 for less than $20 stocks and $3 for over $20) the optimum trade size is a $20 stock for a long entry and $23 for a short entry. This produces an ROI of 15% and 13% respectively.

A $15 stock can produce a 10% ROI which lowers as the price approaches $20. Anything higher than $23 the ROI just heads down as at $30 it is 10% as well. I figure anything with a 10% or better ROI is fine right now.

A side note on this is that while the stock may be at that sweet spot it will not stay there. The idea here is not to just trade at the $20-$23 all the time but to use compounding in order to grow the position size as the price moves away from that ideal price. Starting out with a higher ROI just gets it moving a little quicker.

Ultimately it is all about the cash-flow more than the ongoing per trade ROI.

Starting with a $1,000 position size and making trades that gain 10% to 15% per trade it adds up.

I mentioned my relative ranking system before so I won't get into details now but the new addition is tied for top spot at 21. I heavily weighted the price factor to favour anything north of $20 decreasing as the price increases to $30 yielding a zero for the last price ranking.

The followup is that I missed a really nice entry on that particular stock at that particular time as evidenced by the chart following:

Note the peak on Monday, probably about an hour before I entered my order firm at $23.00. On Tuesday I considered getting in in the mid $22.95's but decided to hold tight, hindsight.

The previous long entry that I mentioned in my post was at $20 to sell at $23 and short immediately at $23. Had I been long I might have missed the short due to the fast peak as I cannot place a short order while holding a long position without having two separate trading accounts (next year I will do that with longs in the TFSA)

Jeff.

A Comparison of Long vs Short Trades... Time Line

I always considered a short sell trade to be the faster moving trade due to prices dropping faster than they typically rise. While that may be true I did some comparisons between long and short trades for my sample of stocks and trades since June 2009.

For 21 stocks that I compared over the course of 434 trades completed there were 268 long trades and 166 short trades.

So I traded about 62% of the trades long.

Then I compared how much time I spent in the trades. I expected that I had spent near 70% of my trade time in the long trades, figuring that they are slower moving and there were more of them than shorts. I was surprised by the results.

I spent only 54% of my time in long trades.

I might suspect that the discrepancy may be due to varied targets, except that a short and long profit target are the same for trades in the same stock when the price is relatively the same.

Well, apparently this throws my assumptions about long vs short trade time frames out the window or perhaps the particular patterns and stats that I look for in my picks are more prone to slower moving down moves.

Jeff.

Leaving money on the table... the prudent plan.

I posted my $3 profit (out at $29.00) on PLCM (Polycom Inc.) on Oct 18th.

Today PLCM jumps to touch $34 off the start due to a good earnings report and an upgrade from Wells Fargo.

While I considered holding it through and trailing a stop last week I chose to stick to the target. Sure, today I may mildly regret my decision, but that can be the nature of hindsight. Taking the profit when the target is reached is always the better choice in my current trading plan even if just to keep a level of consistency about the whole objective approach to the trading.

Besides, the stock price slumped a bit after the good report after hours and only jumped following the upgrade... what if the analyst decided to not upgrade or to even downgrade the stock? I'd be left holding a position in limbo... that is where the trouble begins as indecision can be a profit sucker very quickly.

In future, once my position sizing is larger, I may consider scaling out of trades differently. In this case I only had one trade in so there was nothing to scale with. Even had I had two I would not have tried to hold for a run. Seeing the activity this morning I would have sold off fairly quickly at anything over $33.00.

I did have a possible counter trend play to short this stock today at $31.00 but decided against it after seeing the price action... I only noted the reporting and upgrade after cancelling my order and this serves to show that following what the price says no matter the news is always the better option.

Basically, the price hit my stop for the short entry trigger pre-market which automatically negates my trade idea. This is not a subjective decision.

Jeff.

PLCM profits $3.00 per share

Today I resisted the urge to alter my exit target on my PLCM position.

The setup and the execution:

- Buy at $26.00 (October 4th)

- Stop at $23.00

- Exit target $29.00

- Profit target $3.00 (October 18th)

Result = 11.5% gains in 14 days or 0.82% per day

I still check the daily ROI as my goal is still to hit 1% per day overall. If I wanted to spin the numbers a bit I could use trading days and count this as 1.15%... but calendar days are easier overall.

I watched at the open of market as the price brushed $28.93 and thought that I should cancel my limit order and look at changing it to a following stop once the price passes $29.00, perhaps just set it at $29 to start or see where it goes and set a VTSO for 25 cents or so. While I could have captured more, it did hit the $29.70's, I got busy and didn't look at it until after my limit order had executed.

Now the price is back below $29.00 anyway.

I would rather not have to feel like I need to watch the charts during the day to try to capture these sorts of moves so sticking to my rules and therefore the limits is the plan.

I would have considered leaving exit orders off of some trades in future and leaving winners run but the history on the trades indicates that I am still better in the long run to cut at my initial target. In some cases even lowering my target is prudent depending upon the price activity during the course of the trade.

It all boils down to both trading within the plan, obviously, but also not fighting against a tried and successful plan. This amounts to the tweaking that I am prone to perform once I get to the tried and tested stage which, as often as not, turns a plan with a definite edge into a marginal nightmare to manage.

Over complication does not make for a better trading system.

Over complication is just another side effect of greed.

Jeff.