We covered the benefits of using stops and we are now we are going to take a stroll down memory lane on a recent name that shook myself and one our Alpha Members Valentino out before ripping in our face. The dirty girl was IT, which was setting up through $126.
The first major time to a new high is usually marked by dumb money chasing a name like VERI going to $100 when it was at $70 only to get smoked just as it gets tight. Now as the name eventually gets back to that same high, for IT this would be $126 as there is a psychological wall at that level. Why though? It's very simple, everyone who bought $126 months ago is going to look to sell for break even, trust me people do this all the time, even we do from time to time which you will learn later in The Round Trip Lesson.
This is why we avoid looking to buy on the 2nd major retest, as most people are net sellers that second time. However the 3rd, 4th, 5th time to that major level, more and more of these sellers are leaving the party leaving the stock ripe for a rip. We tried it the 3rd time however the sellers were still there. IT ticked $126 and went a whopping $.22, no thank you, I will take my paper cut. I took the small loss of less than half a percent and moved on. No harm no fail, maybe I was dumb money buying there, who knows?
(Click on the chart for a bigger version)
Now IT gets smoked the next day, remember how when a name gets super tight near a level it shows indecision and is usually eventually followed by a bigger move in either direction with Mr Market deciding the stock’s fate. This time the decision was lower for a $10 pull back that we were no part of. After the dust settled, IT started to base near support of $116. The more times a name gets near resistance we want to buy, however the more times a name gets near support the more likely it is to smoke that level lower (what we want to avoid). Hence why we avoid buying a name that is near support after the 3rd or 4th attempt (usually the exact time most new traders want to buy it because they can get the exact price they want, a bad, bad sign).
(Click on the chart for a bigger version)
After IT holds $116, we buy on the way up vs support, Valentino and myself (Ben) buy IT up through $118 with a stop below $116 about $2 risk. It starts to work, however this is the dirty part, the shake out, we were just a few days too early, and it stopped us out as it flushed $116. Our confidence in the name was at an all time low. This is the mental part of trading that makes it more difficult than looking at it now. Now it’s super easy “I would have bought back $118 and held it until now” most would boost however we didn't and that's all that matters.
Face harsh realities, worry about achieving your goals, understand how to manage pain to produce progress, and hold yourself accountable.
We took a small paper cut, then got shaken out, and the worst mistake was we didn't get back in (3rd time's a charm). This was a 20% trade we let slip through our fingers by getting shaken out. Keep your risk small and be aware that you might get shaken out a few times before you catch the real ticket.
