I Am A Victim Of My Own Success

At twopercentgoal.com we are swing traders.  As opposed to day traders that buy and sell intraday, swing traders hold their position for a slightly longer time horizon anywhere from three days to three weeks.  Our goal is to make two percent a week.  Done consistently, that represents a 100% return over the course of the year.  That is the goal.  How do we do it?  By examining the Relative Strength Index, the stochastic oscillator, the 50-day/200-day moving average, the slope of the MACD (moving average convergence divergence) and finally the on-balance volume.  When all these signals are saying the same thing on the same day, the story is very powerful.  Thus far, I have back tested 60% of the S&P 500 over the last year and the winners are outperforming the losers 3:1. Here’s the problem.  This past week using the strategy, there were some fantastic one-day returns but the orders were not filled.  I earned nothing. I was a victim of my own success.

For the last several weeks I have been saying all along that the markets are overbought and are poised for a pullback.  There are many companies that are overpriced and by shorting them you can turn a quick profit.  I was right.  On Thursday (July 31) International Paper (IP) had a one-day drop of 12.84%. Westrock (WRK) dropped 6.3%, and the next day, Illumina (ILMN) fell 7.84%.  These are amazing one-day returns.  I knew the stock price was going down, and it did.  Here is the problem.  My net profit on each of these was a big fat goose egg.  Absolutely nothing.  How can that be?  If you have identified a great shorting opportunity and the stock did exactly as you forecasted, how is it that you could not profit from it?

The answer is simple.  You always want to protect yourself by using a limit order when placing a trade.  It is the entry point that determines your profit potential and not the previous day’s closing price.  We recommend a limit price 1% off the previous day’s close.  So, let’s assume the stock closes at $100 and you want to short it, place your limit order at $99.  If the stock price was $98.99 and lower for the entire day, your order would not be filled. 

Here is a strange anomaly that I have seen plenty of times.  Let’s say the stock closes at $100 and you place an order to short it at the opening bell the next day and you do not use a limit order.  Let’s say the stock opens at $85 and climbs to $90 at the closing bell.  If you examine the closing price from one day to the next, you would think that you made a 10% profit (it’s actually 11.1%) but you did not.  Your entry point is $85 not $100.  So, you lost over 5%.  Simply put, limit orders protect you from this.  It is very easy to get seduced when you look at the closing numbers for the day.  But they show the comparison price from one day’s close to the next day’s close.  You must look at the point where you entered the trade and not the previous day’s closing price.

When you look at the numbers at first glance and you see a missed opportunity, you think it is a massive woulda, coulda, shoulda, but after sober second thought, limit orders protect you from losses or minimal gains.  Don’t forget rule number one when it comes to investing, don’t lose.

Sign up for the daily email on this website. It will show stocks that have met all the signals and are poised for a 2% gain within a week, including where the limit should be placed.  The email is free for the first 30 days and then $49 per month. 

Cheers,

Al

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