When Things Don’t Go Your Way, Whipsaws, and Other Events
8 September 2007Last August 31, 2007, I entered into a trade with a buy of 3,000 shares of Meralco B at 102.00 The previous night I had studied its chart and concluded that a break out from the neck line of a reverse head and shoulders was about to occur. The volume of shares traded seemed to confirm it and when a senior officer of a foreign bank confirmed that the ERC decision would be out that afternoon and that it would be generally favorable to Meralco, I regarded the trade as low risk despite having risen almost 10% from it's previous drop. After all, the stock's appeared to be stronger than the rest of the market. When the stock closed at 104.00, it seemed that I had made the correct decision.
When the ERC decision came out, the sentiment on Financemanila seemed positive and when the Dow Jones closed higher tha night, I was in a positively giddy mood for what would be a profitable Monday…or so I thought.
Monday morning pre-posting and the gap up I was looking for did not materialize. The buyers did not firm up and contrary to my expectations, someone was posting blocks of shares for sale at 103 102 and 100. The stock opened at 100 and in seconds sold down to 97. By the time I recovered my wits the stock had slid further to 94. I calculated my loss, checked the intra day chart and decided to pull the trigger at 91.5 when it was apparent this was not going to recover and possibly head lower the next day.
So what the hell happened? I clearly did not follow the trading rule that says that if a stock's move does not jive with the expected action then the position should be reconsidered or reversed. If there is bad news and the stock stays where it is or goes up then you should buy or at lease reconsider your short position. Conversely if there is good news and the stock goes down then I should sell or …you get the picture. In this case, because my mind had built a wall of certainty around this trade by the time I could react it was too late. The pre-postings should have been a clear indication that something was wrong and I should have been able to exit in the first few seconds. It would have been so much easier if I was trading a stock based purely on price action rather than on news because the decision making would have been simpler. Break support; I sell. Shoot first then ask questions later. In this case I asked "Why are they selling Meralco when the ERC granted their request?" before shooting… myself in the foot.
I apply a rule to IPOs and anything that trades OTC too. If the stock opens at or above the OTC price then I will hold my position. If it opens below the OTC then it is an automatic sell for me. Manila Water was one of the classic examples of this when it opened below its OTC of 8.50. Recently Pacifica may also be another. Perhaps, if it had opened at 18 or above the first day of bloodletting may have been avoided. Of course, this rule is not fool proof and sometimes I have to subscribe to my earlier rule. During the GMA IPO there were OTC transactions at 10.50, but it opened at 9.50. I sold some shares at that level, but as soon as it started to move higher I reconsidered my position and sold the rest at higher prices (not that I had a lot of shares to begin with anyway). For the NRCP IPO, the same thing happened.
So moving on, I have made back my loss in Merlco elsewhere and I have made a mental note of these events so that in my future trades my actions will be guided accordingly. No rule is fool proof as I mentioned earlier and emotions do get in the way at times but they are there to help me preserve and grow my capital. Hopefully it will help everyone else out there too.
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very nice, which stock did you recover with?
Dare I say it…GEO. I find that the bad trades have more lessons than the good ones.