Most traders have heard the old adage about cutting your losses short and letting your profits run, and Steven Spencer of SMB Capital reviews a recent trade where he forgot that old saying.
A few days ago my trading clerk asked me to take a look at QIHU. It had exploded above its ATH on heavy volume. I didn't take a trade in it on Day 1 but made a note of the 36.50 pullback low after its opening drive. On Day 2, after a stock has broken out, I like to get long if it consolidates above this level.
On Day 2, I got long a quarter position at 36.65 in the late afternoon as it was clearly being bought above the 36.50 support. I was risking about 20 cents on the position with the intention of swinging it for the next leg higher. From a measured moved perspective, if it broke out from the Day 1 high, a reasonable target would be around 40.60.
On Day 3, it opened flattish then drove up to its Day 1 high. My thought process at this point should have been “look for a consolidation to start building a bigger position.” I can honestly say that thought didn't even cross my mind at the time. The fact that QIHU is a Chinese Internet stock was probably impacting my mindset about building a larger position. I don't have the time these days to fully research and understand the risk of holding a Chinese position overnight. And even if I was totally familiar with their business and possible fundamental risks, I still would probably keep the position small because of the “Chinese” risk factor (google “john paulson forest” for more color on this).
I would have been OK with just holding my small original position and getting out when the 30-minute uptrend broke. But that is not what I did. I decided that there would be some resistance at 38 when it traded above the Day 1 high, so I offered stock at 37.98 to get flat. I cannot begin to tell you how stupid this was. I sold a stock that had just broken out on every time frame with ZERO overhead resistance. My sale was 40 cents into what was possibly the beginning of the next leg higher. Now you might respond that “no one ever went broke taking profits”. Well, of course, they have. I have seen hundreds of traders fail in my career for this very reason. They exit positions just as they are beginning to work. And invariably, they make no money as their losers negate the small profits on their winners.
So, as I was reviewing charts this weekend, I saw that QIHU continued to trend higher Thursday and Friday topping out so far at 40.80 still very much respecting its 30-minute uptrend. There is a 98% chance that my clerk will call out something in QIHU this week, and I will most likely grumble something at him and be cursing under my breath.
By Steven Spencer, Co-Founder, SMB Capital