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What They Don’t Teach You At Trading School
Author: Price Headley (info)
Website: http://bigtrends.com
Posted: April 9th, 2007 at 7:55 am EST
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Wanna’ see a wild ride? Wanna’ learn a couple of valuable lessons in the process?
We think one of our recent stock trades - a trade that may have been disastrous for anyone not following our lead - was not only wildly profitable, but also illustrates a couple of key ideas you can implement immediately.
First things first though…check out this chart of Hayes Lemmerz (HAYZ). It shows all the price action through yesterday (Thursday, April 5th). We just hope anybody who owned it at the close of business on Wednesday was wearing parachute - it fell by 32% on Thursday (most of which was a gap).
Hayes Lemmerz (HAYZ) - Daily
Well, guess who owned through Tuesday, but sold it early Wednesday morning for a sweet 43.1% gain? Our NetLetter subscribers - that’s who. We made an exit at our target price of $7.84 on Wednesday, after buying shares at $5.48 on March 21st…..fully escaping yesterday’s destruction.
So are we geniuses? It depends on how you define genius, but frankly, the decision to get out had nothing to do with intelligence levels. It had everything to do with discipline, and more broadly, with just paying attention to the obvious clues…..even if they were incredibly simple.
There were two keys to our success on the Hayes Lemmerz trade, but both of those keys apply universally to all trades. If you’d like to avoid fiascos like the HAYZ plunge, then keep reading.
Volume Means Soooo Much
Here’s the chart again, this time with volume. See the obvious? It was the highest volume day in years, yet the stock basically went nowhere. The technical term is called churning, which is just a fancy way of saying a lot of share were trading hands, but supply and demand were pretty well even.
Hayes Lemmerz (HAYZ) - Daily
That’s not the kind of thing that’s obvious to everyone, but most seasoned veterans can spot it when it’s happening. And, now you can too.
Now, there were two additional factors to consider along with the churning.
One, the churning occurred after a massive price runup that had left HAYZ overextended and/or overbought (which isn’t always a bad thing). That’s a red flag.
Two, the news from earlier that day was…well, at least mediocre. The company took a loss, but the loss was greatly narrowed from the previous year, and sales were slightly higher. All in all not fantastic, but not a negative surprise either. Yet, for some reason, the buying spree came to a screeching halt (though the selling spree hadn’t yet started). That’s another red flag.
Between all this factors, we were content to just let the stock reach our target, rather than try an get cute, by squeezing out more gains when they just weren’t going to materialize.
Get Real-istic!
The other factor playing a role in our timely exit - our system.
Most of you probably understand that we are practically 100% systematic in our approach. By using tools and triggers developed (and tweaked) to help us avoid making decisions ‘on the fly’, we avoid the risk of making errant decisions when the pressure is on. That’s the beauty of a system - it makes decision-making easy.
While we can’t give away our trade secrets, we can tell you that $7.84 was our target from the very beginning. It wasn’t’ pulled out of a hat. This particular system is able to determine the most likely reversal point, and as it turns out, it was very right this time around.
That’s not to say only our systems are valid. The point we’re making is that a system - any valid system at all - can help your mind see things clearly, even though your mind is somewhat designed to be clouded. Get a system…..a simple one will do, if you stick to it.
Epilogue
Now, don’t misunderstand anything. We had no idea Hayes Lemmerz was headed for the kind of disaster it found on Thursday…nobody could have foreseen that degree of selling pressure. However, based on the odd volume, we weren’t shocked either
The point is, volume can tell you much more than a lot of people seem to understand - volume spikes in particular, especially when there’s no net progress on those days.
The second lesson learned - though we didn’t say it explicitly above - is understanding how your emotions can change the way you think. Believe me, it was tempting to cancel the target on HAYZ and just ‘let it ride’ as far as it could possibly go. But, that was a greed-based opinion. The trading system that was behind the HAYZ trade said the upper $7 range was about as much as we could realistically expect. Hence, our target was there. The market also ‘told’ us the same thing with some very high-volume churning at that level, yet was nice enough to give us a day’s warning.
The point is, discipline will pay you well, while fear and greed will eventually rob you blind.
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