In the intricate landscape of stock trading, the likelihood of being stopped out significantly increases when the market experiences a downtrend, moves sideways, or undergoes periods of volatility. Here, we delve into a specific trade, one that unfolded with an outcome deemed unacceptable.
August 2022 apple trade
In my customary fashion, I adopted a multi-part approach to initiating the position. Specifically with AAPL, the strategy involved a three-part opening and a subsequent closure in two phases.
All of these three parts resulted in a loss. Losses are not unacceptable but the amount of a loss can be. This trade was down 8,52% before I closed it. Anything more than 8% is not acceptable for me.
Let’s look at the trade more closely.
trade details
Buy to open: August 15, 2022, at $171.50
Sell to close: August 30, 2022, at $158.80
Quantity: 1 stock.
Loss: 8.52% after commissions.
Sidenote: As evident, I frequently engage in trading with a limited number of stocks. The rationale behind this choice lies in my commitment to utilizing no more than 10% of my capital for a single trade, with an absolute maximum of 25%. Typically, I adhere to a practice of keeping the trade amount at 5% or less.
As depicted in the image above, upon closing the position, the stock experienced a significant decline, falling below key moving averages. I should have sold two days earlier when the price went below EMA-21 (green line).
analyzing buy point
The buy point is indicated by the purple arrow:
Examining the broader context, when extending a trendline from point 1 to point 2 and projecting it forward, it becomes evident that my intention was to secure an early entry, ideally preceding point 3. The strategic decision led me to initiate the purchase precisely at the location marked by an arrow.
what did i do well?
- I purchased the stock while it was in an uptrend, with the price positioned above key moving averages.
What wasn’t going well, or what could be improved?
- During the purchase, the price exhibited volatility, and the absence of a Volatility Contraction Pattern (VCP) made it an unfavorable entry point for the stock.
- It potentially became a Fear of Missing Out (FOMO) trade. Despite AAPL’s reputation for an upward trajectory, the overall price trend, as demonstrated earlier, did not align with a clear uptrend, indicating the presence of some overhead supply.
- Acknowledging this as a FOMO trade, the realization emphasizes the importance of prudently limiting the shares bought in such scenarios to avoid overcommitting.
- The critical observation here is the substantial loss of over 8%, surpassing the acceptable threshold. This occurrence is deemed unacceptable, as my usual tolerance for losses rarely exceeds 8%, with trades typically capped at a maximum 5% loss.
- In hindsight, opting for stocks in a slow but steady uptrend would have been a wiser choice, underscoring the importance of aligning investments with more stable upward trajectories.
