February 20, 2008 at 6:50 am | | Comments 0

What If…

Do you ever find yourself asking, “what if..?”

Maybe you’ve done it in traffic when the lane you had been in is now moving faster than the one you’re currently in. (I hate when that happens.) What if you had stayed in that lane? What if you had taken an alternative route? Would you get to where you’re going any faster?

Well, trading offers unlimited opportunities to ask yourself exactly these kinds of questions, but are those thoughts worth exploring? It’s easy to beat yourself up over moves you did or did not make, so only look in that rear view mirror if there’s something you stand to gain. Let’s unpack this idea a little further.

The Plan

Over at, I put out a nightly newsletter discussing the market averages and the individual trades I’m making. Some are swing trades with a multi-day timeframe, and some are purely day trades where I’m looking to rent a stock for up to a few hours to catch a smaller move. Regardless, every play has a designated trigger price which the stock needs to trade through before I’ll enter the trade, because I want to buy stocks on the way up and short stocks on the way down.

That concept is nice until we get a price gap. We all know that stocks don’t have to open tomorrow at the same level they close at today, so that can sometimes throw a kink into my plans. Sometimes a day trade candidate I’ve listed the previous night gaps through the trigger level. When that’s the case, I don’t chase them, at least not on the open. For day trades, my risk is kept tight and a gap represents a change in the risk/reward profile of that trade.

Every now and then, a day trade candidate will gap through my trigger price and never even look back. They just cruise higher while I sit there and watch, not participating. When that happens, my initial response is inevitably to kick myself, but that doesn’t serve a purpose. Instead, I need to review the stock and see if missing a great move is cause for concern.

Let’s look at an example and I’ll show you what I mean.

Monday night, I listed CLF as a day trade candidate for Tuesday if it could trade up through $118.30. On Tuesday morning though, CLF gapped through that price by nearly $2, so I skipped the trade not wanting to chase the upside gap. I’ve seen a ton of them fill, especially on the first trading session of the week. Nonetheless, CLF proceeded to run another $6 rather quickly after gapping up $2, and it wasn’t easy to watch! Here’s a look at the move it made after gapping above the trend line:

(Click for full-size image, courtesy of TeleChart)

The Evaluation

After passing on a trade and seeing a move like that, it’s time to evaluate what happened. Sometimes a distraction can be the cause for missing a move. Other times perhaps it’s diminished confidence after sub-par trading, or maybe it’s even due to a stock moving so fast that we simply choose to cancel an order.

What we’re wanting to determine is whether what happened was the exception or the rule. If it’s the rule, then there had better be a good reason for skipping the trade! However, if it’s the exception, then there’s no need to beat ourselves up over not catching it.

In this case, there were a couple of logical reasons why I chose not to take the trade. First was the frequency with which gaps have been getting filled lately. I don’t want to buy into what is typically a great opportunity for selling. Second is the shift in the risk profile of the trade. With a closer target on my day trades, I absolutely have to keep my risk in check, and that means a tight leash on such trades. I can’t make a habit of paying up by $2 above a trend line when my timeframe for the trade is minutes or hours, as that’s rarely acceptable when my timeframe is weeks. With CLF set to report earnings this week, I had to have an abbreviated holding timeframe for the trade (as per my trading rule of avoiding earnings).

So upon further review, this time I get a pass. It can be a helpful habit to run through this thought process after the fact in stocks which are in your trading plan, whether you took the trades or not. But when you do so, limit the time you spend looking backward. Take what you can from each experience, and if you find something useful, apply it going forward. Stick with your plan and take the trades which you feel have the highest probability of working for you. All else can be ignored.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Swing Trading, Investing[/tags]

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