“Patience makes the wallet grow bigger”

Welcome back traders to another great week of learning from a newbie.  Hopefully, I was able to shed some light on the downfalls of rolling covered calls last week and how emotions can often control decision making for new traders.  My hope is that you all are learning as much from reading this as I am by writing it.  So that brings us to this week’s topic, “Patience makes the wallet grow bigger,” or the heart grow fonder however you want to look at it.  In my trading experiences, it is the latter. 

So as I was sitting here pondering what it is I wanted to discuss this week I decided to go back and take a look at my trading journal.  My goal was to take a look at some of the trades I made in the first month and where the stock price was today in relation to my entry and exits then.  It took me about 10 seconds to realize exactly what I wanted to discuss.  The results were astonishing.  WHAT IN THE HELL WAS I DOING! While I did manage to get lucky on a few, I made some really bad trades as well.  If you have never done this I highly recommend you check it out. 

You can clearly see the learning curve as the trades and days progress.  What stood out the most though was:
a) I had terrible entry and exit positions,
b) I did not either trade with the trend or trust the trend I was trading, and
c) a little patience would have almost always resulted in profit.
So let’s take a look at a few charts so you can get a better idea as to what I am talking about and then I will tell you why I believe I made the decisions I made at the time, after all hindsight is always 20/20 right or is it?

The first chart I want to look at is BSX, my intent was to swing trade BSX on a break of 28.00. On a side note my broker had not yet approved me to write uncovered options so these are straight stock swing trades.  Ok back to where I was, I used the rules (SET) that I was taught and entered on the break, set my stop at 27.24 and had my target at 28.67.  I was ready to go!  As par for the course, this stock immediately sold off the rest of that day, dipped to 27.13 the following session, stopping me out and ended up closing with a higher high to maintain the bullish trend.  This was my first lesson in trusting the trend.  The stock went on to touch 28.64, .03 shy of my target before retracing.  What is the current stock price you might ask, well see for yourself:

So the next chart I want to show you was my first time “shorting” a stock.  SNAP was in a bearish downtrend and I was trying to lower my delta so I went out to find a bearish trade.  This was the one I liked.  The problem was that I had already missed the first leg down, but my thought was that it was going to “fill the gap,” and fill the gap it did, but my impatience didn’t allow me to stay in the trade longer than 2 days.  I missed out on a ton of profit by not trusting the trend on this one.  Take a look:

Let’s do another, shall we?

This time let’s look at a winning trade.  So I entered NBL after a big day the previous day and entered once it broke the previous HOD.  Based on my previous trades I loosened my stop loss so as not to get stopped out early.  As soon as I entered, the stock naturally dropped as they all seem to do when I enter.  However, this time I elected to trust my beginner analysis and was determined to stay in the trade as long as it closed higher than the previous days close.  It did and went on to hit my target at 31.01 and I exited my position.  Looking forward, the stock continued to do very well as I am noticing most of my trades continue to do.  Take a look:

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Well I could go on and show you even more charts that reveal the same outcome but I will save you the time.  So what is the takeaway? Well for me this was a pretty eye-opening experiment and one I hope you will go back and try.  The moral of the story is this:

1 – I am sure you have heard the sayings “the trend is your friend” or “trade the trend.”  I know I have heard this a thousand times, but it took me some hard lessons to understand just how important this is.  My emotions have let me down, the trend has never let me down.  TRADE WHAT YOU SEE! When the trend changes, change with the trend until then trust what you see!

2 – Patience is a virtue, there is a famous quote by Sir Warren Buffet that says “The market is a device for transferring money from the impatient to the patient.”  In my short experience as a trader, this has never been truer.  See I had in my mind that I wanted to be good a day trading as well as perfecting my cash flow systems.  Word to the wise, day trading is hard and takes way more experience than I currently have.  I have taken day trading out of my arsenal, it has cost me more money than it has given me.  Any guess as to what else has cost me? That’s right my inability to be patient.  The right trades at the right time, coupled with the right amount of patience will equal success!

3 – The importance of understanding Technical Analysis, specifically support and resistance cannot be stressed enough.  As I look back at some of my first trades I am baffled at how ignorant I was.  I didn’t apply technical analysis 101, rookie mistake, don’t forget the basics! It’s ok to miss the run, don’t chase and don’t catch the falling knife! Let the stock come to you, there are set-ups out there, go find them!  Use Support, Resistance, and confirmation before entering any trade, duh right!

 

Well, I hope I was able to shine some wisdom on you again this week.  I can’t tell you how much I enjoy doing these, it is making me a better trader every day.  Good luck and see you next week!

“Rule number 1: Never lose money. Rule number 2: Never forget rule number 1.”- Warren Buffet

See you all next time,

Randal Edmondson