Do you know what is the #1 rule about stock trading?
Trading can be a rollercoaster. Sometimes, you find a stock that seems perfect, but then it turns out to be less than ideal. How do you navigate these waters? Let me share a recent experience with you that highlights the importance of sticking to your trading rules. I’ll walk you through my trade with MOD stock and what I learned along the way.
Opening
I recently traded MOD stock. On May 7, 2024, the stock price was $105.72. I set my stop loss at $98.97. The position risk was 6.32%, and the risk to my net liquid (NL) was 0.31%. My profit target was $126.86, promising a potential profit of 19.81%. The risk-to-reward ratio was 0.32.
The market outlook was a confirmed uptrend. The stock’s RS Rating was 99, with an upward RS line trend. The industry rank was 40 out of 197. The volume up/down ratio stood at 1.1, and institutional ownership was on the rise. My position size was 4.83%.
Why did I open this trade? The stock was breaking out of a base, and its price outperformed 99% of the overall market.
Was it an ideal buy? No, because the volume wasn’t high enough.
Closing
On May 20, 2024, the closing price was $103.45. The market outlook remained a confirmed uptrend. I placed an alarm on the stock after closing the position. The RS Rating stayed at 99 with no change.
Why did I close the position? I closed it before earnings because the position didn’t build a profit cushion. It was in a slight loss. According to my rule, I have to sell the stock before earnings unless the profit is at least 5%.
Results
- What went well?
- I sold decisively and followed my rules.
- I bought the stock as it was breaking out of a base.
- Cause of Error / IMPROVE:
- I should have bought in May 2023 when the stock was breaking out of its early base.
- Lessons Learned:
- It’s strange that I still have tendencies to break the rules, despite my experience. I had the impulse to keep the position and continue speculating, even though the rule says I must sell.
- Position ROI, %: -4.00
- Position ROI (portfolio), %: -0.19
- Position Open Time (trading days): 10
- Position Open Time (days): 13
Get Rid of JUNK!
My number one rule in trading is to protect my capital. The first step is finding good candidates. But sometimes, good candidates turn into junk.
How do you determine junk? William O’Neil said, “all stocks are bad unless they go up.” If it doesn’t make you money, it’s junk. At least for now.
Steps to take:
- Pin the stock.
- Ask yourself, “Would I buy it now?” Ask several times and take a few minutes to think about it.
- If the answer is no, you have two options:
- Sell immediately or
- Set a very tight stop-loss.
The latter is psychologically easier. The former is more effective. With this stock, I did the second one. And the stock got sold.
How do you know it was a good decision to get rid of the stock? You wouldn’t buy it back. At least for now. You can always buy the stock back.
Get rid of JUNK!
details at a glance
Explanations for the Drawing
The upward purple arrow shows where I bought the stock. The downward purple arrow shows where I sold it.
Green Line 21-day exponential moving average line (see EMA 21 below)
Red Line 50-day simple moving average line (see SMA 50 below)
Black Line 200-day simple moving average line (see SMA 200 below)
Opening
- Underlying: MOD
- Date: 7 May 2024
- Underlying Price: 105.72
- Stop Loss: 98.97
- Position Risk, %: 6.32
- Position Risk to NL, %: 0.31
- Profit Target: 126.86
- Potential Profit (position), %: 19.81
- Risk to Reward Ratio: 0.32
- Market Outlook: Confirmed uptrend
- RS Rating: 99
- RS Line Trend (U/N/D): U
- Industry Rank (X / 197): 40
- Volume U/D Ratio: 1.1
- Institutional Ownership Trend (U/N/D): U
- Position Size, %: 4.83
- Why did I open this trade at that point?
- Stock was breaking out of a base (with not heavy volume).
- The price of the stock outperforms 99% of the overall market.
- Was it an ideal buy?
- No, because volume wasn’t high enough.
- Remarks:
- Strong stock in a seemingly steady uptrend. It is not a CAN SLIM stock right now because sales growth doesn’t add up.
- At the time of buying, industry rank was 40/197, which is a bit low. It would be better if it were in the TOP 10 or TOP 20.
Closing
- Date: 20 May 2024
- Price (close): 103.45
- Market Outlook: Confirmed uptrend
- Did you place an alarm to the stock after closing?
- Yes
- RS Rating: 99
- RS Change: 0
- Remarks:
- I closed the position before earnings because the position didn’t build a profit cushion. It was in a slight loss, and the rule says that I have to sell the stock before earnings unless its profit is at least 5%.
Results
- What went well?
- I sold decisively and followed the rules I had created for myself.
- I bought the stock that was breaking out of a base.
- Cause of Error / IMPROVE:
- I should have bought in May 2023 once the stock was breaking out of its early base.
- Lessons Learned:
- It’s so weird that I still have some tendencies to break the rules even though I have quite a bit of experience in stock trading. I just had the impulse to keep the position and continue speculating, even though I knew that the rule says I have to sell.
- Position ROI, %: -4.00
- Position ROI (portfolio), %: -0.19
- Position Open Time (trading days): 10
- Position Open Time (days): 13
terms and definitions
Ever felt like trading lingo was designed just to keep amateurs out of the loop? Let’s simplify a couple of terms:
EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.
SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.
SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.
Pivot price is the optimal buy point of a stock is defined as the moment it transitions from a stable basing area or chart pattern and begins to achieve new highs in price.
Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.
U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.
RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.
RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.
Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.
Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.
EPS (Earnings Per Share): A financial metric calculated by dividing a company’s net profit by the number of its outstanding shares. It indicates the amount of profit attributed to each share of stock, serving as a key indicator of a company’s profitability.
Conclusion
Trading requires discipline and sticking to your rules. Sometimes, even with experience, the temptation to break your rules is strong. My trade with MOD was a learning experience, reminding me to stay disciplined and follow my strategies. Remember, protecting your capital is the most important rule in trading. If a stock turns into junk, don’t hesitate to get rid of it and move on.
By the way, if you have any thoughts or questions, fill out the form here and I’ll get back to you.
