These two skills have been my strengths since my first trade which was a purchase in GME right off the August lows in 2007, through to buying JRCC and EOG off the March 2008 lows, I also bought SPU and NEP right at the February 2010 lows and most recently I bought DTG coming up off last July's lows.
So my timing and entering stocks in tune with the markets have never really been a problem. What I have come to realise especially after reading many of Pradeep Bonde's posts on http://stockbee.blogspot.com/ is that my stock selection had been very inconsistent. Although I have always maintained some remnants of the CANSLIM formula in my stock selection, I never adhered to the all the criteria and never did so consistently. I researched some of my stock picks and never did so for others basing their inclusion in my watchlist solely on their technicals and my "gut feelings".
My purchases in SPU and NEP coming of the bottom in February are perfect examples. Although my timing was perfect I made no money because these stocks did not have a fundamental catalyst pushing them higher and infact all the leading chinese stocks with the exception of CAGC had pulled back sharply from their highs on volume compared to other leading stocks I had on my watch list at the time indicating that they would likely have trouble regaining their highs as did turn out to be the case. So although the momentum in the chinese stocks had clearly died down, I still persisted with them without a strong fundamental reason.
Another example was my purchase of DTG instead of JKS coming off the July lows on the 19th. Both of them formed bull flags (although JKS's was slight better since it formed at all time highs and had a better volume pattern). I arbitrarily went with DTG instead of JKS although JKS had a much better fundamental story, high growht Chinese IPO at new all time highs as opposed to slower moving DTG which had two EP's back in May but nothing much else to indicate high probability of rising. So instead of cashing in on a 100% gain that I would have had now if I had bought JKS at the time and held to now I made a measly 11% gain. By the way DTG is now below my exit price even after a take over bid!
After much research on Pradeep's blog and others such as http://markminerviniblog.blogspot.com/ and http://chartpattern.com/ I have created a spreadsheet with 13 criteria that I use to attach a probability of out performance to each stock that I find interesting from my screens and where ever else I happen to see an idea. Below is a copy what the spreadsheet currently looks like. Symbols highlighted in brown have very high probability of outperforming. I will look to risk up to 4% -5% in these when they are just emerging from a base while the markets are turning around after a correction and also to pyramid aggressively and risk 2% - 3% on swing trades during up trends. Those in white have good probability of outperforming and with these I will risk 2 - 2.5% on base breakouts but no more than 2% on swing trades during up trends. Those in purple meet few of the fundamental criteria but have had a recent EP and very nice chart setup. I classify these as speculative trades because though they have a nice chart and potential short term fuel they do not have many of the characteristics of past big winners. With these I will make swing trades only and risk no more than 1% of my account on trades in these stocks. Although they are the riskiest they offer the potential for really explosive moves in a short period of time. Look at AUMN and REDF for examples of what I mean. So that is why I still look for and try to take these trades.
My second weak area has been trade management. For instance, although I got into JRCC at the start of the move that begun in early 2008 I never got more than a 30% gain in this stock, same with GME in 2007 , EOG in 2008 and TSTC in late November 09 and DRWI in mid-December 09. It occured to me that in all of these trades I did not have a predetermined exit strategy. In other words, I did not know how I was going to get out these trades if they moved in my favor before I made a purchase.
In order to deal with this weakness, I have decided to two things. The first is to categorize trades as either a swing trade or a position trade before I enter. Secondly, I have decided to start scaling out of positions instead of exiting all at once.
With swing trades I will identify targets using resistance and/or projections based on previous trend. Then around the targets I will use my discretion to manage a trailing stop. If the stock is approaching the target and appears to be losing momentum then I will exit part of the trade and trail a tight stop based on the hourly/30 min chart intra day charts on the remainder of the position. If it reverses then I get to take most of my profits near my target. However, if it regains momentum then I can still squeeze some extra profit on the remainder of the trade. The amount I take off will depend on market conditions, sector strength and price action all taken together. On the other hand, if the stock pushes through the target price and looks poised to move even higher then I will trail a looser stop off of the hourly chart looking for big profits.
For position trades, I will use a trailing stop beneath swing lows on the daily chart. If the stock makes an up precedented move like a large gap up or a five day parabolic run then I will look to take some of the trade off into the strength and let my trailing stop take me out of the rest. I will also use trend lines, moving averages and overall market action as secondary sell indicators. Generally speaking, however, I will not exit a trade unless it hits my trailing stop for position trades. Now there are nuances about trading position trades like adding back positions and re-entry after shake outs. However, these are topics for another post and are best illustrated real time. This I will attempt to do down the line during the course of my trading.
Despite these stark weaknesses in my trading I have still managed to grow my account about 50% from Decomeber 2009 through to August 2010 in a generally tough market. Makes me wonder what kind of returns I am capable of in the future now that I made these major changes to my trading. Hmmmmmm....
Hope you find my thoughts useful.
Good luck and good trading!