The truth is that no strategy comes without losses, and learning from losing trades and making adjustments is the key to long-term profitability. Here are four losing trades and lasting lessons from each.
Did you get the check for $17,856? I am amazed at the number of e-mails that I receive touting a “sure-fire” trading system, and there is always a common theme among these e-mails: “Never any losers!”
Just yesterday, I was offered the next winning “66 trades for free.” Reading further, I was disappointed to learn that I would not double or triple my money on every trade. Why can’t I just pay for those trades that would double, triple, or more?
I am hoping that only a small number of investors are naive enough to think that there is a financial analyst, newsletter writer, technical analyst, option hotline editor, or televangelist who has never had a losing trade and is more than happy to share his winning secrets.
This is Wall Street’s dirty little secret, as successful investors and traders know that everyone has losing trades. I have often felt that some of the best learning experiences come from losers, and therefore, in the spirit of disclosure, I am going to review some of my losing recommendations from the past months to see if there is something that can be learned from them.
Chart Analysis: On January 26, I discussed the overall bullish outlook for the stock market, and particularly the materials sector, which I though would benefit from additional strength in the US economy. One of my recommendations was AK Steel Holdings Corp (AKS).
- AKS appeared to have completed a reverse head-and-shoulders bottom formation, as it closed above the neckline (line a)
- Relative performance, or RS analysis, was in a short-term uptrend, line b
- Daily on-balance volume (OBV) had been rising from the October lows, line c, and volume increased on the close above the neckline
- My recommendation was to buy on a retest of the breakout level
- The first buy level was hit the next day, and the second buy level was hit six days later
- AKS proceeded to decline steadily from the late-January highs, and on February 9, the uptrends in both the RS line and the OBV were broken
- Four days later, the stop was hit (see arrow), resulting in a 9.6% loss
In a leap-year column, I discussed the bullish outlook for stocks in March and pointed out the heavy volume surge in the semiconductor stocks. One stock I liked then was Cavium Inc. (CAVM), which had just broken above weekly resistance (line 2).
- The RS line had broken its year-long downtrend, line e, and appeared to have bottomed (line f)
- OBV was acting much stronger than prices and shows a bullish uptrend, line g. It had also moved well above the 2011 high
- On February 29, CAVM dropped in late trading to close on the lows, and the buy level was then hit
- As the updated candle chart indicates, CAVM continued to decline, closing the week on its lows
- The stop at $34.78 was hit the following week, stopping longs loss out for a loss of approximately 4%
- One week later, the OBV broke its uptrend (line g), and this was followed by a break of support in the RS line
- On April 10, CAVM made a low of $28.10, which was 19.2% below the stop at $34.78