Not every trade feels quite that good. As you will find out, some of your trades will be more of the pleasure mixed with pain variety. This is quite true for the next trade that I will examine. Falling from 51.50 to 1.0625 in less than a year, Priceline.com (PCLN) could have caused me much more pain than it did. But the hurt I felt was less the kind that destroys one’s portfolio and more the kind that gives one a distinctly Pavlovian shock.
While I was having fun researching alternative energy stocks, I was also taking a little free time each day to gawk at the laughably low prices of some of the fallen “dot-com” stocks. Although I knew that these stocks retained little of the sex appeal that they had had only 6 months earlier, I still saw the potential for traders to give them a significant price boost when the Nasdaq turned around. I was watching PCLN, among other $2 to $4 Internet stocks. On April 9, only a day before I bought FCEL, I decided to buy PCLN. I had been watching PCLN for a week or longer, but I did not buy on the day that my indicator gave me the buy signal. I had no valid tech- nical reason for my actions. The only reason I bought on April 9 instead of on March 30 was that my money was committed to other stocks.
However, when I did have the capital I needed, I took a look at my indicators and decided that I hadn’t missed the move yet. Also, judging from the movement of the Nasdaq, I saw the beginning of a turnaround.
This would create the right conditions for a successful rally in PCLN.
I took my position in PCLN at 2.91. I waited and watched for several weeks, checking my indicators every day or two. When the stock ended lower for the day, I would be sure to check my indicators to make certain that it hadn’t given sell signals. By May 1, PCLN had risen to over $6 per share. The day after that, it had risen to nearly $8. My stock had gained about 250 percent in value. But my indicators didn’t tell me to sell. I held PCLN with the intention to sell when I received the appropriate signal.
If you check a historical chart of PCLN, you can probably see why this trade was a learning experience for me. I had the chance to sell near 8 for a huge profit. Deciding to hold my shares on May 2, without a stop-loss or any other means of risk management was my biggest mistake. On May 18, I sold my shares for 4.94. Although my position made a sizable gain of about 170 percent, I had lost the opportunity to make a bigger profit.
What went wrong? I failed to use a risk management method to secure my profits. I let them slip away. After I saw such a huge profit disappear, I even forgot to check my indicators because I was disappointed about my losses and therefore lost my discipline as well.
I was lucky that I had an opportunity to sell at nearly 5 instead of sell- ing at 4. After all, if I had sold in response to indicator signals, I would
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Figure 9-1. Three-month daily chart of FCEL.
have been out of my trade on May 7th or 8th, at a much better price. This trade, although profitable in the end, did not leave me feeling successful. I was determined to find every mistake that I made.
SUMMARY
The first major difference between my FCEL trade and my PCLN trade was my vision. When I decided to make my trade in FCEL, I asked myself,
“What do I want out of this trade?” The answer was clear and concise. I wanted to buy a stock for a 10- to 15-point move. On the other hand, when I bought PCLN, I did significantly less thinking. My objective was less clear. I did not have a tangible price goal. My goal was more along the lines of, “I think it could double.” Once it did double, I didn’t know if I had reached my goal. I wasn’t sure how much of my profit I wanted to protect.
In short, my plan was too loose!
When I bought FCEL, the situation was much different. My actions were much more systematic. I always had a tangible goal by which I could gauge the success of my trade. Once I reached my goal, I did not have to sell automatically. However, I did know that from the point I achieved my goal forward, I had to guard my profits.
By comparing these two styles of trading, we have gained some impor- tant insights into making investment decisions. Being clear about your goals is paramount. It’s acceptable to try for a small profit at first and then to see how much more you can gain. Just make sure not to be greedy and unrealistic about how much more you can gain after your goal is reached.
Using proper risk management to avoid major catastrophes takes a lit- tle more time, but in the long run you’ll be a much happier camper. Finally, if you’re not the risk-taking type and you prefer to sell once you’ve achieved your goals, you can still be very successful.
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