Introduction
In the dynamic world of stock trading, each trade offers a wealth of insights, particularly those that don’t go as planned. In this detailed analysis, we’ll dissect a trade involving AGYS, focusing on what went well, what could be improved, and the lessons learned. This post-mortem analysis is crucial for traders seeking to refine their strategies and improve future outcomes.
Trade Overview
OPENING
- Stock: AGYS
- Opening date: 2023-11-07
- Opening price, $: 88.91
- Stop-loss, $: 86.48
- Profit target, $: 102.41
- Open RS: 93
- Market Outlook (open): Confirmed uptrend
CLOSING
- Closing date: 2023-11-09
- Closing price, $: 85.34
- Closing RS: 92
- RS Change: -1
- Market Outlook (close): Confirmed uptrend
- Why did I close?: 4-th closing day in a row
OUTCOME
- ROE pos, %: -6.08
- ROE portfolio, %: -0.25
Analysis
What Went Well?
Raised Stop Price
Implementing a raised stop price was a strategic choice designed to limit potential losses in a trade. This precautionary measure protected the investment from steep declines, proving its effectiveness.
Without raising the stop-loss, the loss would have been even larger, though the 6.08% loss was already higher than your typical tolerance for losses. This highlights the importance of risk management in trading and investing, as the raised stop price played a critical role in curbing the extent of the loss.
Limited Overhead Supply
The high buying price resulted in a limited overhead supply. This situation is often advantageous, as it implies fewer sellers above the purchase price, potentially easing the stock’s upward movement.
- High Buying Price: When you mention a “high buying price,” you’re referring to the price at which investors acquired a stock. In this context, it means investors purchased the stock at a relatively elevated price.
- Limited Overhead Supply: The phrase “limited overhead supply” indicates that there are fewer shares of the stock available for sale at prices higher than the purchase price. In other words, there aren’t many sellers in the market who are looking to sell the stock at prices above what buyers paid.
- Advantageous Situation: This situation can be advantageous for investors because it suggests that there are fewer obstacles in the form of sellers looking to sell at a profit above the current price. This can potentially make it easier for the stock’s price to move upward as there is less selling pressure from those who purchased at higher prices.
- Facilitating Upward Movement: In summary, when there’s a high buying price coupled with limited overhead supply, it means fewer sellers are looking to sell at a profit above the current price, which can help facilitate the stock’s upward movement as there are fewer barriers to its price rising.
Reasonable Investment Amount
Allocating only 4% of the trading capital was a judicious decision. This conservative approach was particularly wise, considering the emotional underpinnings of the FOMO-driven purchase.
You shouldn’t place more than 5% of your portfolio’s net liquidation value into a relatively volatile stock. The main risk is that you will be late to get out when the stock goes down.
What Needs to be Improved?
Buying an Extended Stock
Purchasing AGYS ‘way above EMA-21’ was a critical misstep. Overextended stocks carry a higher risk of price corrections, and this trade was a stark reminder of that risk.
- Critical Misstep: Buying AGYS at a price significantly above its EMA-21 (Exponential Moving Average with a 21-day period) was a major mistake. Stocks that are “way above EMA-21” often signal overextension, indicating they’ve deviated substantially from their recent average price.
- Higher Risk of Corrections: Overextended stocks like this one are more susceptible to price corrections, which can lead to losses for traders or investors. This trade serves as a clear reminder of the increased risk associated with buying stocks that have strayed too far from their average price, emphasizing the importance of cautious decision-making in trading.
Volatility of the Stock
The intraday price fluctuations of AGYS made it an unsuitable choice for a stable, long-term investment. High volatility adds a considerable level of risk, regardless of the intention to hold the stock with expectations of future price growth. In the quest for stocks with potential long-term upside, lower volatility is generally preferred as it makes the investment more manageable and less susceptible to sudden and unpredictable price swings.
The key takeaway is that while seeking stocks with upward potential, it’s crucial to consider their volatility. Lower volatility stocks are often better suited for a buy-and-hold strategy, providing a smoother and more predictable ride for long-term investors, with less exposure to unexpected market turbulence.
Volatile Price Action in Bases
The stock’s erratic price action even in its bases highlighted an unstable pattern, deterring from the predictability and safety of the trade.
In the realm of stock trading, stability in price patterns holds a paramount role in the decision-making process. A stock that adheres to predictable and steady price movements is typically considered a safer investment. However, the challenge arises when a stock’s price exhibits erratic behavior, even during periods of supposed stability, known as ‘bases.’ This erratic price action, where the stock unexpectedly fluctuates during what should be a calm phase, can significantly disrupt the predictability and safety of the trade.
This instability not only undermines the predictability of a stock’s future movements but also increases the associated risk. Investors and traders often rely on a stable base as a foundation for their decision-making, and when this foundation is shaken by unpredictable price swings, it becomes challenging to assess the safety and reliability of the trade. In such cases, careful analysis and risk management are essential to navigate the uncertainties that come with erratic price behavior.
Lessons Learned
Avoid Highly Volatile Stocks
The primary lesson from this trade is the importance of avoiding excessively volatile stocks. Their unpredictability can lead to significant losses and challenge trade management.
There are plenty of opportunities out there that are less volatile and have a better potential for price appreciation.
Overall Analysis and Corrections
Typical Case for a Trade with a Loss
This AGYS trade is a textbook example of a losing scenario. It underscores the need for prompt action to curtail losses when prices start to decline, adhering to the fundamental principle of loss limitation.
Volatility Issues
The overall high volatility of AGYS deemed it an unsuitable candidate for trading. The stock’s inconsistent price movements indicated a lack of a clear trend, which is often a red flag for traders seeking stability.
Overextension at the Time of Purchase
The decision to buy the stock at a point far removed from the EMA-21 was flawed. A purchase closer to the moving average could have offered more stability and a clearer trend indication.
Conclusion
In summary, the AGYS trade, though not profitable, provided valuable lessons in risk management, the significance of buying within stable price ranges, and the pitfalls of emotionally driven decisions like FOMO buys. These insights are instrumental for enhancing decision-making and risk assessment in future trades. As traders, it’s through such reflective analyses that we sharpen our skills and strategies for the challenging yet rewarding journey of stock trading.
