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What Did I Do Wrong???

|Includes: OmniVision Technologies, Inc. (OVTI)
From Sunday, September 12, 2010
What Did I Do Wrong???

I had one of my members ask me this in our live trading chat room the other day. When I asked him to explain, he pointed to a call I made on OVTI earlier that day. I called OVTI in our live chat room on Friday morning as a potential long idea. It had already been down 3 days in a row, and was giving a low risk possible turn using 5 minute candles...we are talking a dime risk per share. Well, this member pm'd me later in the day and asked me, 'what did I do wrong'? I looked at the chart and the answer was easy.....'nothing'. It was oversold, and people shorting OVTI down here were shorting pretty late in the game. It gave a clean setup just like we teach with a narrow candle for a clearly defined risk. The entry was 19.15 with a 19.05 stop.

'But, the trade didn't work', he said. Absolutely true, but that doesn't mean we made a mistake. You cannot trade without losses, so we remain patient...and take only the low risk setups that make sense. I quickly pointed out to him that OVTI gave us another low risk setup (like we teach) about 30 minutes later with an entry of 18.55 and the stop only a dime below again. This time it ran to 19.77  for $1.20 per share gain in about 4 hours on a .10 cent per share risk that never got hit.

That's how trading works. You take the setups that work, and cut your losses quick when they don't go in your direction. He argued that if he would have just ignored the first stop he would've never lost money on the first call. I was so happy he said that because it brought up a great learning opportunity for everyone in the chat room.

How many times can you look at a chart at the end of the day and say, 'Man....if I would've just held on through that pullback I could have made money on that trade'? Have you ever done that? Have you ever thought to yourself...'that stop cost me money....I knew it would bounce back'?  Stops are overrated.

To that I say WRONG! That stop saved you money. Had you ignored the stop and held all day even through that .60 cent pullback/selloff, and the stock came back with fury and you banked .60 cents per share profit vs a .60 per share loss, that trade would end up being a huge loss...perhaps even an end to your trading career.

What???? It was a nice gain. That doesn't make sense, Mike!

Oh yes it does! Once you teach yourself that stops don't matter, it's time to start looking for a new career. You got away with this one, but there will come a day when you won't. Trust me, it only takes one bad trade to erase weeks of good ones. Some people get this and some people don't. I have been running since 2004, and I've seen many traders come and go. I've gotten countless emails about accounts being blow up because they ignored the rules we were teaching all along. 'I believe you now, Mike....I get it. I will be back when I can raise the capital and next time I will listen to you'.

The market is humbling to be sure. The trick is to listen to the guys who have blown up accounts. It all falls back to the old proverb, 'A wise man learns from his own mistakes, but a genius learns from the mistakes of others'.

So, 'What Did I Do Wrong'??? If you followed your trading plan, managed a correct position size within your risk tolerance, adhered to your predefined stop and got out when the stock hit it....then my answer is NOTHING!

Best Regards!


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.