Trading a stock where you've already missed some good returns

[systematic]

This is a common psychological one that I'm sure many of us can relate to; disappointment of missing out leading to hesitation in the present.

Our psychological challenges can also change with the wind, depending on whatever else is going on. For example, I've seen this before without it bothering me, but at the moment it does - and it surprised me (that it bothers me).
I thought it might be fun - maybe even useful to beginners etc - to share, get your thoughts or hear about your experiences as well.

So about 6 months ago or so I was having a look at my absolute top rated stock (on the ASX). The thing is, I didn't need any stocks at that time (no portfolio changes happened until August), but I checked in on it every now and then, out of interest. Had a very nice trend upwards, making around 80-90% in those 6 months or so.

The thing is, I'm doing a bit of a portfolio refresher for the New Year, and sure enough - this stock is still my top stock.

Now, I imagine short-term traders that are in and out of stocks within hours, days or weeks or even a couple of months are used to going in and out of the same stocks all of the time.

But traders with a medium to longer-term hold might relate to what I'm describing here.

As I said, at other times it wouldn't bother me - so maybe it's just the mood I'm in or something...but even though I've never traded the stock, the idea of buying it after 'missing out' on those returns annoys me...and I noticed enough (almost in an amusing way) for me to think it's worth a post and see if any others have had similar times? Or perhaps it was something else...but again, it was something that wouldn't bother you at other times but suddenly does?

Either way I appreciate being able to have a little vent

 

[tech/a]

First saw this when trading Techtrader live on “ The Chartist “

Because it was a system just followed the rules.
QBE Went from $3 to $24
TAH plus 500 %
We’re a couple I remembered both were late to the party.

Just lately BIG

Pixel told me of a successful trader he knows that wont hesitate
Getting onto a stock even if it looks like it left the station a while ago.

You won’t get these unless you have a loose exit condition

If you’ve got a plan for failure after purchase then should be fine

 

[Cam019]

Great thread @systematic.

I thought I'd share my experience in the hope that other beginner traders will post and possibly share some things that they have been struggling with.

My psychological challenge over the past 14 months hasn't been failing to pull the buy trigger after a run up, but rather 'style drift'. That is, taking trades that don't conform to my trading plan (I didn't have a trading plan) because I have seen someone, either on a forum (here) or on twitter trading well and making money in another style and I would try and emulate it. Interestingly enough, I have made money as well as loosing money, but none of the trades have been good trades as there was no written down trading plan for me to follow, just a vague plan in my head.

This year I am dedicating myself to disciplined trading. There will be no trading until I have a full trading plan written down and at my desk to follow. I will not be taking any trades that do not 100% meet my trading plan regardless of how 'tempting' they might look.

 

[willy1111]

I think it all comes down to how much faith you have in your system.

If you have backtested, backtested and backtested until you are completely confident in your system/s, executing the orders should be very robotic without much physocolgical impact, well that has been my experience anyhow.

One trade shouldn't make or break, next 1000 trades as Radge says.

However without a properly defined backtested system, I can see how there may be hesitation when taking certain trades.

 

[So_Cynical]

I make a watchlist or 2 when interesting things happen, made a couple for all those broke exploration stocks that were getting reverse take over-ed during the mining bust thinking that there had to be 2 or 3 or 4 gems amongst them, once again my thinking was proven to be correct.

One watchlist has BIG added at 0.245c now trading at $3.58 ~ of course i just watched it go up and up..there have been so many over the years - i found bitcoin at 80c and absolutely knew i had found something very unique, didn't buy it though did i.

The lesson for me is to pay attention to my instincts and not beat myself up over passing on something, i have plenty of winners, broadly my strategy works despite missing some massive winners and selling way too soon on some others.

Thinking about it only once have i liked a stock a lot and bought after a rise, Aconex turned out ok.

 

[systematic]

Some nice replies here - thanks guys!

Just lately BIG

Pixel told me of a successful trader he knows that wont hesitate
Getting onto a stock even if it looks like it left the station a while ago.

You won’t get these unless you have a loose exit condition

If you’ve got a plan for failure after purchase then should be fine

.....Oh yeah, BIG was a recent example, I remember! Is BIG still a 'buy' stock for you now?

My psychological challenge over the past 14 months hasn't been failing to pull the buy trigger after a run up, but rather 'style drift'. That is, taking trades that don't conform to my trading plan (I didn't have a trading plan) because I have seen someone, either on a forum (here) or on twitter trading well and making money in another style and I would try and emulate it. Interestingly enough, I have made money as well as loosing money, but none of the trades have been good trades as there was no written down trading plan for me to follow, just a vague plan in my head.

This year I am dedicating myself to disciplined trading. There will be no trading until I have a full trading plan written down and at my desk to follow. I will not be taking any trades that do not 100% meet my trading plan regardless of how 'tempting' they might look.

.....This was great, thanks for sharing Cam019! So true - when our plan is only vague (or non-existent) we just float from one thing to the next. Hope you get that plan nailed down soon...sounds like a great start to the new year.

I think it all comes down to how much faith you have in your system.

If you have backtested, backtested and backtested until you are completely confident in your system/s, executing the orders should be very robotic without much physocolgical impact, well that has been my experience anyhow.

One trade shouldn't make or break, next 1000 trades as Radge says.

However without a properly defined backtested system, I can see how there may be hesitation when taking certain trades.

.....Another great thought. Totally agree. My 'hesitation' or annoyance shows that it seems to have been a psychological reaction, as the trade fits within the plan and wouldn't have bothered me at other times. It's got me curious because I'm not sure that we can ever escape the human element and be 100% robotic (and I'm not sure we should want to). And that's from someone who tries to be robotic about trading / investing. So it's interesting - how does the person who already agrees with back testing / systematic trading etc protect against the odd times that psychological weaknesses (normal human behaviour) rises to the surface?
I've heard that some 'active' traders take breaks etc. That probably works for systems involving a plethora of trades over shorter holding periods, but not so much for an already pretty low key system?

I make a watchlist or 2 when interesting things happen, made a couple for all those broke exploration stocks that were getting reverse take over-ed during the mining bust thinking that there had to be 2 or 3 or 4 gems amongst them, once again my thinking was proven to be correct.

One watchlist has BIG added at 0.245c now trading at $3.58 ~ of course i just watched it go up and up..there have been so many over the years - i found bitcoin at 80c and absolutely knew i had found something very unique, didn't buy it though did i.

The lesson for me is to pay attention to my instincts and not beat myself up over passing on something, i have plenty of winners, broadly my strategy works despite missing some massive winners and selling way too soon on some others.

Thinking about it only once have i liked a stock a lot and bought after a rise, Aconex turned out ok.

Bitcoin at 80c - wow!
Sounds like you naturally lean towards beaten down stocks as part of your process (which of course, at times, will have it's own mental challenges!)

 

[tech/a]

I make a watchlist or 2 when interesting things happen, made a couple for all those broke exploration stocks that were getting reverse take over-ed during the mining bust thinking that there had to be 2 or 3 or 4 gems amongst them, once again my thinking was proven to be correct.

One watchlist has BIG added at 0.245c now trading at $3.58 ~ of course i just watched it go up and up..there have been so many over the years - i found bitcoin at 80c and absolutely knew i had found something very unique, didn't buy it though did i.

The lesson for me is to pay attention to my instincts and not beat myself up over passing on something, i have plenty of winners, broadly my strategy works despite missing some massive winners and selling way too soon on some others.

Thinking about it only once have i liked a stock a lot and bought after a rise, Aconex turned out ok.

I can certainly associate with this.

Just adding to my comments above.
There is a couple of other things I have found handy.

(1) Watchlists and constantly adding and culling using
(2) and (3)
(2) Identifying those stocks that are likely to continue.
I do this by finding Control Volume to the upside. It
occurs at the beginning and during moves setting a base
that is rarely taken out on its way skyward.
(3) Understanding those moves which are exponential and
the signs that mark continuation (micro Patterns).
(2) and (3) are more about getting an entry with least at risk.
(4) Having a re entry mechanism.

Explanation of (2) Example




Random examples

 

[tech/a]

BIG

No trade finished as far as a buy was concerned and inclusion in a watchlist
On 24/11 and still remains there.

 

[jjbinks]

One thing i've noted in my limited trading experience is that stocks (or for that matter anything else you trade) that have already started rising may have small corrections and if you have tight stop losses you may be stopped out before it starts rising again. If you can tweak your entry criteria and stops to avoid this you have a winning strategy. (Easier said than done haha)

 

[tinhat]

This is a good topic for conversation. Disappointment of missing out has definitely been a failing in my share investing history.

I've been subscribing to Lincoln Indicators Stock Doctor service for many years. They have their own fundamental analysis model, developed by the founder who was an accounting academic that rates stocks according to their financial health. They then filter these stocks against growth criteria to identify what they consider the "star stocks" of the ASX as well as a second tier of "emerging star stocks". It is a conservative model but it is sector and index agnostic and throws up a lot of smaller companies. By the criteria of their model, a stock won't become a star stock until it has demonstrated three continuous reporting seasons (18 months) of solid growth and balance sheet health. Their investment team analysts also have to judge that the growth is likely to continue.

For these reasons, a stock that becomes a star stock is likely to have already had a significant rise in share price over the eighteen months preceding its selection as a star stock. The chart will often give an impression that one has missed out. Furthermore, because star stock entry and exit into the Lincoln model portfolio is not based on TA, a stock can come in and go significantly nowhere for some time as it has already had a decent run up in price.

It has been my observation and I understand this is confirmed by Lincoln's own back testing, that buying and selling star stocks based on when they come into and out of the Lincoln model portfolio out-performs. Catching the falling knife and value hunting for heavily "discounted" value leads to under performance at least in relation to the Lincoln star stocks. This is in part because, just as the share price can run up ahead of a stock entering as a star stock, the market will often run ahead of the stock exiting as a star stock, although Lincoln have improved their proactiveness in continuous analysis of star stocks outside of reporting season the system largely relies upon companies reported financial data.

I still look to pick a turnaround, a recent example being AX1, but it is more risky that going with the momentum.

 

[Joules MM1]

This is a good topic for conversation. Disappointment of missing out has definitely been a failing in my share investing history.

I've been subscribing to Lincoln Indicators Stock Doctor service for many years. They have their own fundamental analysis model, developed by the founder who was an accounting academic that rates stocks according to their financial health. They then filter these stocks against growth criteria to identify what they consider the "star stocks" of the ASX as well as a second tier of "emerging star stocks". It is a conservative model but it is sector and index agnostic and throws up a lot of smaller companies. By the criteria of their model, a stock won't become a star stock until it has demonstrated three continuous reporting seasons (18 months) of solid growth and balance sheet health. Their investment team analysts also have to judge that the growth is likely to continue.

For these reasons, a stock that becomes a star stock is likely to have already had a significant rise in share price over the eighteen months preceding its selection as a star stock. The chart will often give an impression that one has missed out. Furthermore, because star stock entry and exit into the Lincoln model portfolio is not based on TA, a stock can come in and go significantly nowhere for some time as it has already had a decent run up in price.

It has been my observation and I understand this is confirmed by Lincoln's own back testing, that buying and selling star stocks based on when they come into and out of the Lincoln model portfolio out-performs. Catching the falling knife and value hunting for heavily "discounted" value leads to under performance at least in relation to the Lincoln star stocks. This is in part because, just as the share price can run up ahead of a stock entering as a star stock, the market will often run ahead of the stock exiting as a star stock, although Lincoln have improved their proactiveness in continuous analysis of star stocks outside of reporting season the system largely relies upon companies reported financial data.

I still look to pick a turnaround, a recent example being AX1, but it is more risky that going with the momentum.

https://www.thechartist.com.au/

take a gander, gandering is still free

 

[So_Cynical]

a stock that becomes a star stock is likely to have already had a significant rise in share price over the eighteen months preceding its selection as a star stock. The chart will often give an impression that one has missed out.

Much like an ASX300 re-balance, most of the new entrants have already had a sustained run up, and most of them continue on, most but not all.

 

[Mr Bear]

My strategy specifically targets stocks that are the best performers, at times I'm buying stocks that have doubled in price in a short time period.

The key for me is the value and momentum, for years I tried buying "cheap stocks" what I thought this meant was buying stocks that had fallen but were good businesses, I realised after many losses this was a terrible strategy. I don't want to buy cheap stocks that are falling, I want to buy cheap stocks that everyone is buying not selling. The market is irrational, no point buying something cheap if everyone fell out of love with it or I have to wait 2 years for everyone to notice it's a cheap business, you can leave this to asset managers, I work for one of the largest in Australia and can tell you I see these value destroying investments all the time.

In regards to buying a stock thats doubled; lets say the company is worth $1 but trading at 50c, the stocks doubles so now you don't want to buy it purely because it doubled in price but at it's next AGM the results revalue the stock at $2. The opportunity is no different to when it was trading at 50c but now you don't want to touch it. I'm always buying stocks that can beat in the next two results periods.

Lastly, I've run over 10k screens on Bloomberg and I can categorically tell you buying cheap stocks with negative momentum Vs cheap stocks with positive momentum results in significantly different results.