Following A Process Can Serve Many Purposes

This post is not an endorsement for my firm’s asset management services nor is it a recommendation to buy or sell securities mentioned. Everything written here (like all my posts) is for education purposes only.

Back in July I wrote a post about following your process through thick and thin, discussing a trade I had missed because I strayed away from following my procedure due to the infection of emotion.

Another great example of why we must follow our processes came from a recent trade I made within one of the models we have at my firm. I’ve blocked out the company name and ticker symbol because I don’t want you to get bogged down with what stock it is but focus more on the practical principle at hand.

Let me begin by saying that not all positions and trades at my firm are short-term. We’ve held some stocks for 6+ years (with varying degrees of exposure at different times). However, the position I’m using as an example today was something that only got held for a little over two months. It was a stock that had recently broken out to a new high but then began to consolidate with a series of slightly lower highs. I began watching for support around $32.75 as my exit point,which lines up with prior consolidation lows and near the breakout point. This stock broke support on October 25th after several failed attempts to break above its 50-day Moving Average.

So at this point we had a stock that’s turned support into resistance (with respect to the 50-MA), made a series of lower highs, and has broken support. This met my sell criteria and the position was exited. This isn’t a trade that turned into a 10-bagger like many on social media like to selectively share.  But what did ultimately happen, was it fell 20% in the two days after I exited. I of course had no idea it would decline by that much but I am thankful for the ability to follow a process and protect my firm’s clients capital. It’s important to recognize what the market’s trying to tell you. For this stock, it was that things were beginning to break down. While it was surprising to see the stock sell-off as hard as it did after we sold, I’m not overly shocked that it saw weakness – because that’s what the chart was telling us – price action is weakening.

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So much focus gets put towards when to buy something and I get why. That’s the fun part, that’s the flashy adrenaline pumping part of trading. What’s more fun, buying a new car or selling your old one? Of course buying new! But guess what, (in most people’s cases) you can’t buy a new car unless you’ve sold your current one and the same applies to stocks. We have only so much room in a portfolio, our attention can’t be solely on searching for new shiny stocks to buy. We must also monitor what we currently own and hone in our skills on when to sell.

Let me end by saying, yes this is a cherry-picked example. Not all stocks we sell drop like a rock once the sell order is executed. I do not write this post to pound my chest but to provide an example of the positive outcome that can be produced when you stick to your guns and follow your process. So often we see articles and blog posts written on successes had from a stock quadrupling but a success in trading isn’t defined by just how much money is made but also how much is also not lost.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.