December 16, 2007
Update and Review of a Black Box Trade
I thought it would be good to update and review one of the box trades from last week, and talk about various ways to manage the fear and greed of this open trade. You’ll recall my post last Sunday with this box pick:
Short MAN below 64.10
Protective Stop above 65.13
Target #1: 54.44 to 55.20
Target #2: 51.86 to 52.58
Target #3: 44.22 to 44.83
(IF YOU’D LIKE TO RECEIVE THESE DAILY TRADING IDEAS, PLEASE EMAIL ME TO JOIN THE LIST.)
A short entry should have been taken last Monday below 64.10 and a protective stop instantly put in place above 65.13. Assuming that you were risking around $500 on the trade, you would have shorted 500 shares.
On Tuesday the stock traded lower and closed at 62.13, which was close to 2x your initial risk. If you were the skittish type, you’d move your protective stop to breakeven by this point. On Wednesday MAN closed lower at 60.95, almost exactly 3x your initial risk. On Thursday the stock closed at 60.38 and on Friday at 59.45, over 4x your initial risk.
The highest target the box is looking for is 55.20, which is over 7% below Friday’s close (quite a drop).
An open short of 500 shares would be sitting on around $2300 of gains here, and you wouldn’t want to give that all up if price reverses and goes back up. I’m open to suggestions about what to do here (please leave a comment), but here’s one idea:
I think it might be smart to lock in around $500 in gains by covering 100 shares here and moving the protective stop on the remaining 400 shares down to around breakeven at $64 (if you hadn’t done that already). You can wait patiently for 55.20 with the knowledge that you took around $500 out and won’t get hurt on the remaining 400 shares if price reverses and trades back up through $64.
Letting it ride (greed) and intelligent stop management (fear) is an art that I certainly have never mastered.
What do you guys think?
December 16th, 2007 at 8:33 pm
I can’t send you an email to get on your list. Please include me.
Thank you.
December 16th, 2007 at 9:34 pm
I’d wanna look at the greeks / risk graph but how ’bout selling 5 Jan 60 Calls?
I’d like to be on the Black box e-mail list too.
Gracias.
December 16th, 2007 at 9:38 pm
Not selling the calls…you could buy the calls…or sell the puts.
The only problem with using stops on swing trades is the gap risk. Options can take care of it but then you have other problems. Ok..time to dig out of all the snow we have in NY.
December 16th, 2007 at 10:29 pm
uptik: I have no idea about options and have no clue how to price these usually super-illiquid instruments.
December 17th, 2007 at 12:57 am
I did not enter this trade, but had I, based on the price action I would be covering at least half of the position and watching the rest very carefully, ready and willing to get out altogether with a nice profit. It’s down near the bottom of the BB’s and flattening, but MACD, RSI and stochs point to a bit of further weakness.
Nice trade, guess I’ll need to pay more attention to those box pix.
What does DeMark look like, hotshot? :-)
December 17th, 2007 at 2:08 am
Unless a short is hedging my overall portfolio (normally index shorts) I try to cover half (especially when the reward comes quickly) and then move my stop down accordingly. At close of day I would be inclined to leave open only that much of a position that i can live with no matter what happens at the open.
As a point of interest, Fiday’s close seemed somewhat overdone and steep that I would clearly be happy with whatever my profit cause a bounce monday morning is probable.
December 17th, 2007 at 8:19 am
@CapGain: Thanks for your insight; would you have a breakeven stop on the half you didn’t cover? Weren’t you one of the guys, like Donk and Born2Code, who said MAN looked best out of those six things the box came up with? I thought you were paying close attention. :-) I haven’t looked at DeMark but I will when I go to the office today.
@Blizzard: Can you expand a little bit about “moving the stop down accordingly”? I too believe in taking “windfall” profits but I say that as a day trader, and have no experience with handling these multi-day swing trades like MAN.
December 17th, 2007 at 9:47 am
No I misssed MAN. I thought CEPH might play short, but it’s only down slightly.
I would not only cover 1/2 or more but would also protect gains on the uncovered. I’d move the stop just tight enough to avoid getting whipsawed out during normal vol. - easier said then done!
Maybe 61ish.
Good luck, good trading, and always know that I am probably wrong!
December 17th, 2007 at 10:17 am
@CapGain: OK, thanks. CEPH didn’t trigger so it was discarded and forgotten.
December 17th, 2007 at 11:45 am
i have not trade MAN but i have been short JCP and RL on similar patterns for many weeks now.
I am becoming more and more of a system trader with a longish viewpoint so take my opinion in the context of my longer time frame.
Stocks breaking down in this fashion tend to have violent rallies caused somebody thinking it became a value play all of the sudden (WM anybody?) and by people covering their shorts for one reason or another.
If you have the guts to stomach those rallies then you should keep your shorts till the chart starts forming a base or till we go back to the 2006 base/breakout point at around $45.
The logical stop is still above the recent lower-high ($65.13), it does not make sense to move the stop unless you succumb to fear. In this case you may as well just close the position and take your profits.
If possible i would not place a hard stop but exit end of day if we close above the $65.13 level.
The only problem with those those breakdown plays is buy outs. I was short GLYT a month ago when it got an over-night offer for a 50% premium. I went to sleep in the green, woke up deep in red. To protect against such a scenario you could buy the Jan $65 calls for about $0.80. Those would replace your stop and let you sleep better at night.
December 17th, 2007 at 11:51 am
sorry for the poor English. i did not proof read my comment.
December 17th, 2007 at 11:52 am
@Born2: Thanks for your insight. I see what you’re saying about keeping the original stop in place, but I think the emotional damage of not only giving up all the profits but also taking a loss is too great, and it pays from a psychological standpoint to take some money off the table and go to breakeven on the rest. Mechanical is all well and good but it doesn’t take into account your mental health. :-)
December 17th, 2007 at 12:08 pm
completely agreed. The most difficult part of system trading is sticking to the system. Developing a profitable system is trivial, sticking to it is a nightmare.
That’s why i like to diversify my positions (several shorts, several longs, different sectors, …).
Helps me “worry” about the overall portfolio instead of “worrying” about individual positions.
December 17th, 2007 at 12:26 pm
Born2: Yes, the thing is the box gives no clues about how to manage the trade other than the initial protective stop and the targets (prices where profits should definitely be taken) … everything in between is a no-man’s-land, but I’m pretty sure that we can collectively come up with something good.
December 17th, 2007 at 12:27 pm
CapGain: Here’s the sequential chart of MAN you wanted.
December 17th, 2007 at 12:38 pm
Does that sequential chart show a set up that looks awefully close to your intraday Dummy set ups?
Interesting…
December 17th, 2007 at 12:54 pm
i am sorry, i glazed over your initial post and did not realize that this was a piece of software you were trying out. i thought the “box” was just an inside joke…
i say dump it, i will give you a better system for free.
1. Just check out IBD for “Stocks on the Move”.
2. Pick stocks that are above their up-trending 200 day MA and have the following conditions:
a. Move larger than the 20 day average true range.
b. Volume larger than twice the 50 day average volume.
c. Move based on earning’s expansion, a new product, a new business agreement, etc… — NOT based on some analyst comments.
3. Use a mental trailing stop based on a Keltner channel (basically rely on stock’s own volatility to determine the stop)
4. Size your position according to two criteria:
a. The difference between your entry and stop is something you could stomach for each position’s loss.
b. A Black-swan event, the stock going down to zero overnight, does not blow up your account.
5. Ride the stock till it closes below your mental trailing stop.
For shorts, i enter stocks from the previous list of long candidates that have had over a 100% run-up, formed a topping pattern and started to break down. Use the same rules as longs.
The exact entry price is almost irrelevant. The time-frame is months to years. i have positions open for months in my accounts. Back testing shows it is not unrealistic for some positions to be open for years.
December 17th, 2007 at 12:58 pm
@Eric: Well the basic entry idea of shorting beneath an up bar and putting the stop above the recent swing high is the same. The Dummy trades are based on finding low-risk spots to enter unusually active and volatile (intraday) movers.
@Born2: Thanks for your system but I’m hanging onto my box for now. :-)
December 17th, 2007 at 2:23 pm
It looks like it wants to drop a bit, declining on decent volume.
I still say partially cover and lower the stop - I never let a winner become a loser if I can help it.
December 17th, 2007 at 2:47 pm
CapGain: Yes, that’s what I was trying to say to Born2… there’s no way I’d stick with the original stop here; I’d go to breakeven at least.
December 17th, 2007 at 8:31 pm
I would pocket 1x initial risk at least, giving me a free trade to play with.
December 17th, 2007 at 10:53 pm
CM, Cap: That’s the definition of fear and greed. The chart does not know anything about your entry.
If you move the stop to something other than the most recent lower high then you are basically picking a random stop. If you are going to pick a random stop then you may as well just close the position right now booking all your profits thus far.
The reason an investor wouldn’t book the profits now is “Greed”… they want more.
The reason they would move the stop is “Fear” they are worried about losing their profits.
What invariably happens is that the stock will move up, take out your new stop and then proceed much lower.
Leaving you with the third investor emotion “Regret”.
December 17th, 2007 at 11:37 pm
@Brian: Thanks for your take.
@Born2: I hear you on the random stop issue, that’s why I said take maybe $500 out and let the rest ride at breakeven to deal with the possibility of “regret.”