Bought 1 JWN Jan08 40 put for $6.10

The stock has been in a downtrend since March.  It bounced around between a downtrending resistance and support line until 11/2 when it broke down below the support line.  It has now come back up to the old support line, which is now acting as resistance, and bounced down off of it, with confirmation from the MACD and stochastics.  It also did a semi-bounce in mid-November, but it never made it all the way to the line, and the MACD and stochastics did not give a clear signal either.  This time it is a very clear buy signal.

The stock is currently at $33.72.  However, I bought my put earlier in the day when the stock was around $34.70, so my put is already about $75 profitable.  Resistance is currently at around $36.15 and support is around $30.25.  The support level I have drawn in is connecting the lows from last July and 2 weeks ago.  I don’t think it’s a very strong support level, but it still provides a good reason to get out of the trade.

My exit orders are:

• Market order to exit if the stock trades above $37.25.
• Trailing stop loss if the stock trades below $31.25.
• Stop loss on the option at $3.00

The value of automated exit orders

I’ve complained after a couple of my recent trades like AMR and USG that my automated exit orders have stopped me out of the trade too quickly and I missed out on part of the gains I could have had.  Today was a perfect example of the opposite effect.  I exited my FAF put yesterday after the stock opened down below the level of my exit order and then rose straight up from there.  Even though the stock went down almost exactly to the first support level I had drawn, I still wondered if I could have stayed in the trade and waited for it to go down to the lower support level.  Today, the stock surged up by $2.25.  Had I not set my exit order, or set a more aggressive exit order, I would still be in the position and would have lost over $300 from where I exited the position yesterday.  There’s definitely something to be said for locking in profits when the market makes them available.

Sold 1 FAF Jan08 40 put for $10.10

I bought this put on 11/15 for $7.50.

One of my exit orders was to enter a trailing stop loss if the stock trades below $30.  Yesterday the stock closed at $30.87, but today it opened at $30.44 and immediately fell down to $29.55 before heading back up the rest of the day and ending up at $30.92.  My stop loss order was triggered and got me out at just above the low for the day.

The stock went down almost exactly to the first support level that I had drawn before heading back up.  It’s still possible for it to continue down to the second support level, but the strategy I’m using here is to get out at support.  This was a well-executed trade.

Week ending 11/23/2007

The short holiday week was pretty good for my portfolio.  My portfolio gained about $267, the largest weekly gain since I started this website.  My USG and AMR positions closed out profitably, and my FAF position is doing well.  My SGP call is down after having been up as much as $170, and I suspect it will likely break below support and close out for a loss next week, though we will have to see.

I’ve been giving a lot of thought to ways to capture profits on stocks that go up halfway or more to my target and then fall back down.  The book Trading in the Zone describes a strategy that sounds interesting, which involves buying positions in multiples of 3 so you can close out a third of your position on some intermediate target price and lock in some profits.  I’ll get into more details of how that works and how it can apply to multiples of 2 and 4 in another post.

I’ve also been seeing quite a few stocks that have been following a similar pattern on the way down, and I’m thinking about adding it to my list of experimental techniques.  I’ll have a post about this soon as well, but I’m thinking that maybe I should continue with the two techniques I have now until I have done at least 20 trades.  I don’t want to get into too many techniques too quickly or the results could be lost in the noise.

Another thing I’ve been dealing with are the emotions of success.  I think that it’s OK to feel satisfaction that my trading overall is going well, but it’s counter-productive to feel too much satisfaction about any particular trade being successful.  The former is necessary because it’s what drives me to want to do this in the first place.  I’m not the kind of person that can do something I don’t enjoy just for the money, so it’s important to me to enjoy the process as well.  However, the latter can cause problems because if a winning trade feels good then a losing trade will feel bad, and that just sets you up for trading not to lose instead of trading based on probabilities.

Sold 1 AMR Jan08 30 put for $9.50

I bought this put on 11/16 for $8.00.

I set a perhaps too conservative target price of $20.50, and had a trailing stop loss that was triggered by that price.  Just like my USG trade yesterday, the stock went down to just below $20.50, went up by about $0.10 and caused my trailing stop loss to execute, then continued to fall.  I think a more reasonable target price would have been around $20.00, since support is at around $19.50.  Can’t complain, though, since I still made a 18.75% return on the trade in 3 trading days.

Sold 1 USG Feb08 45 put for $9.40

I bought this put on 11/5 for $7.50.

One of my exit orders was to enter a trailing stop loss if the stock crossed below $35.50, which it did today.  Unfortunately, it dipped below $35.50, went back up for a bit so I was stopped out of the position, and then continued to fall.  That’s the tradeoff with having an automated exit - sometimes you miss out on bigger moves.  The benefit is also clear, however, since it was also possible for the stock to recover from that point and take my profits with it.

Week ending 11/16/2007

My streak of profitable weeks ends at 4.  This week I took a small loss, mainly due to the loss I took on CBST.  It was still a good week, though, because I didn’t make any mistakes in my trades (that I have detected so far, anyway).  Even the CBST trade was properly executed.

Something that I want to improve on in the future is finding more sources for stocks to put in my watchlists.  Currently I have about 50 stocks each in my bullish and bearish watchlists, but I get very few confirmed trade signals.  It might just be due to the fact that the market has been so uncertain recently.  However, I have yet to invest more than 30% of my portfolio at one time.  I don’t want to start taking bad trades, but I would bet that there are plenty of good trades out there that I am not seeing. 

The other thing I need to do is to stop passing on trade signals, like I did with SPR last week.  This week, the stock went down to just below where I would have set my exit order ($34), and I would have made a nice profit on it.  It definitely wasn’t worth trying to save $10 on my entry price.

Bought 1 AMR Jan08 30 put for $8.00

The stock has been in a downward trend since last October (when it also started a pretty nice head and shoulders pattern).  It has come up and bounced down off its resistance line, and MACD and stochastics are both heading down.  The stock is currently at $22.47.  Resistance is aroudn $24 and support is around $19.50.

Here are my exit orders:

• Market order to sell if the stock goes above $24.75.
• Trailing stop loss if the stock goes below $20.50.
• Stop loss on the option at $4.00.

There are two lines on the chart that represent very long term resistance (at the top of the chart) and support (coming in from the left, broken in August).  Those don’t really affect the current trade.

Bought 1 FAF Jan08 40 put for $7.50

The stock has been in a downtrend since July.  It has come up and bounced down off the resistance line, and MACD and stochastics are both high and turning down.  The stock is currently at $33.22, with resistance around $34.50 and support around $29.

My exit orders are:

• Market order to exit if the stock trades above $36.
• Trailing stop loss if the stock trades below $30.
• Stop loss on the option at $3.00.

Sold 2 CBST Jan08 17.5 calls for $3.90

I bought this call on 11/12 for $4.70.

One of my exit orders was to sell if the stock broke below its support and traded below $20.85.  The stock fell down a bit below support yesterday and then recovered, but continued to fall today and hit the exit order.  Net result is a loss of $160 on this trade.

Despite the loss, I think I executed correctly on this trade.  It clearly bounced right off of a supporting trendline, and MACD and stochastics both acted as confirmation.  I set my stop to 3% below support, and it triggered, possibly preventing a much bigger loss if the stock continues to fall.