Learn To Take A Loss

Feb 13th, 2013 | By | Category: Steven Spencer (Steve's) Blogs, Technical Plays
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I was trading GMCR this morning. I consider it to be a Top 8 “momo” stock. It would probably be #2 behind NFLX if it hadn’t done a dopey 3/1 stock split a couple of years ago. “Momo” stocks are stocks that “fast money” hedge funds are constantly pushing around.

GMCR gapped lower on earnings last week and had a pretty solid Day 1 bounce. It then sold off for two days before bottoming on Day 3 which was yesterday. The thing I like most about momo stocks is they just set up over and over again. The hedge fund players have not altered their playbook one bit in the 17 years I have been trading. It is really quite astonishing.  So the setup that started forming yesterday was a multi-point reversal.

Look at the chart below. After making a new low on the Open of February 12th GMCR quickly bounced over a point. On its next pullback it held the bid just above the prior day’s low. This is the first evidence of a possible reversal and not an area I would be interested in putting on a trade. I needed to see more evidence that momo buyers were stepping back in to accumulate the stock for a multi-day move. That is what occurred on the two higher consolidations later in the day.

In a market with a strong bid like we are currently in you will see traders getting in early on this type of trade as it will work more often, but I prefer to see accumulation at several higher levels before committing to the reversal trade. I am not concerned about being late because I know a momo stock will move farther than most stocks and the move should last several days.

Before the market opened I visualized what price action I wanted to see to get long. If it drove up strongly above the prior day’s high I would look to accumulate into the first pullback. And if it ever consolidated above the opening high I could build a larger position. My out was below the prior day’s afternoon high. I judged the risk/reward on the trade at 1/6 at a minimum.

My trade management was good as I was able to bring my average price to within 25 cents of my stop. I also took off 25% of the position when it was sold when it made a new high reducing my risk a bit if I were to be stopped out. If it had held above the opening high I would have built a larger position.

I was stopped out of the remaining 75% when it traded below the prior afternoon high taking a loss. If on the desk I would have given it one more try as it was clearly being bought again during the next 30 minutes at this key level. It eventually moved higher closing a few cents below the HOD. Tomorrow I will be back in if it holds above this level.

For more details on my entries, exits and stops take a look at SMB Real Time.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is sspencer@smbcap.com.

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  • Bruss Bowman

    Really, really great stuff here.

    /*
    Before the market opened I visualized what price action I wanted to see to get long.
    */

    This single statement encapsulates much of the value I gained from SMB training.

    IF price action does this THEN I will do that. As a trader I *always* want to be prepared and know ahead of time what I will do given price action. I want to be waiting for the trade to come to me.

    Steve, like the format of this post, showing where you get in and out of positions. Very helpful.

    -B

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