Oh Shit Moments

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Even with all the filters and scans and planning at some point during your trading career, you WILL have a stock move against you in an unexpected and dramatic way.

FIO was a recent stock that moved against me in early May. Let’s take a look at the setup and the eventual drop and actions taken during the event.

FIO popped up on the earnings list toward the end of April with a huge move from $15 to $20. After the stock settled a bit it looked like it was finding support around $18 towards the first week in May.

In anticipation of a breakout, I took a position on Monday the 6th. Two days later, the stock opens down 20% or more on news the CEO and founder were leaving the company.

There was a time where I could have had up to 25% of my account invested into this single stock. Throw some margin on top of that. Lucky for me, I’ve been slapped over the head enough times to get the point. A few years back, I began backing off larger positions aiming for a more stable approach to position sizing and risk management.

Margin use is limited to periods where breadth is moving up and has not reached extremes. Positions are max 10% of total account value. Stops are always executed at -4%. Profits are taken at 8%.  Simple rules to follow and execute.

On the morning of the 8th FIO was sold for a 25% loss. No hemming and hawing, just execute the plan. Looking back at my logs it was about a 1.8% dent to my account. In the grand scheme of things not very significant compared to the damage that could have been done in the past.

The funny part, some how the account managed to close positive for the week. In the past, this would have been a devastating trade that not only hammered my account balance but also would of shattered my confidence. The worst place to be when trading. You may give up a little on the upside, but the cost of keeping your confidence is worth it.

Lots of traders focus on the setup but ignore the money management and risk management side of trading. Each trader is different. Take some time to review your trades and figure out where the holes are in your trading plan. From there you can modify your plan to help protect your account and your confidence. Be ready for your Oh Shit Moment, because it’s coming…sooner or later.

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