A Nice Problem To Have 
Welcome to this newsletter for Easy share Trading.
I got an email a few weeks ago from Geoff, an old trading mate.
"Are you holding MFG?"
He got in early on this trade that turned out to be a screamer. He now has the 'nice to have problem' of a stock taking off. "Problem?" I hear you say?
Turning his 53K position into 100k does not seem like a problem to most people,but psychologically this can play havoc with your mind.
It made me consider one of the best trades I have ever done. It was 2002 and I was following the Rivkin report at the time. Rivkin was tipping a stock, I bought some, and then more of it, it went down. Rene kept saying it was good and was going to go back up. I thought to myself at the time "No, this stock is going down, I am getting out" It fell all the way from 60 cents down to 5c before it was de-listed. I lost about 10K of a 60K position.
I regard that as my best trade ever, yes I lost money, I did not lose it all if I had of listened to anyone except myself. I look it as saving 50K.
Let's compare the two situations psychologically, in both we have sums of money over 50k. In either situation going up and down rapidly. Fear can cripple you in both situations, holding losses or giving back some of your gains without an exit plan creates fear and stress in the market.
Getting back to the email my mate Geoff sent me.
"It’s a position that most traders will be in at some point in time, and I am sure everyone will have a different way of handling the outcome."
I could not have put it better Geoff, if you are trading probability .... some point in time you will be in the same situation. Getting in on a trade that screams off after some good base building.
What is in your system to handle something like this?
Do you think you are prepared mentally?
I ask my assistant Cale to come up with an analogy. After sitting there for a bit he turns to me and says "Street racing... You know, illegal cars and such."
He goes on to say that one of his favorite series of movies from a few years back is the fast and furious movies. One of his favourites is "Too fast Too furious."
I obviously ask for him to elaborate as I have no idea how one relates to another.
"Well, in this movie world of cars, girls and money, you are playing many probabilities and working with large sums of money. The cars are always fed large sums of money with parts, time and effort. Before the race starts, spectators are placing bets according to who they think will win, based on the probabilities they can observe and know about.
The drivers of cars are at the most risk, they could lose their entire investment by crashing, but they are playing the probabilities too, assessing the skills and cars of the other drivers, as well as the vehicles financial backers. Also, there are many distractions as you can imagine, girls in skimpy clothing, drugs, guns and under the table deals.
It's a crazy, gritty, fast paced and chaotic world that is portrayed, how is it not like the market?"
Following that analogy are you mentally prepared like the driver? Going to keep calm and play the probabilities or let the situation overwhelm you?
More from Geoff
"Having 33% of my portfolio in one stock has me worried, on the other hand I have considered selling and taking the profit a few times now only to see MFG continuing to go up."
Have a look at Geoff's chart here.
This is not uncommon, having taken the signals from his system and pyramiding into this stock Geoff now has a large position in MFG.
There is no absolute right thing to do, only the right thing for you.
I emailed him back with these options.
"Geoff
My thoughts are you have these options
1- Stick to the system and see what happens, you obviously know the draw-down (maximum pull back) of your method.... but I gather you don't want to experience that.
2- Do some more testing of your method using tightening filters, or profit exits, see how that effects results. If you prefer those results to the ones you are already getting from back testing, then change the plan, not before.
3- Create some breathing space and less emotion by selling either one or both of your pyramid positions.
The extra positions are the ones that will turn into losers the quickest if the stock falls, but you will still have the initial position to ride. Advantages of this is you lock in gains whilst going back to the drawing board to create a system that doesn't have the big draw-down number, if you were
happy with the draw-down number of your current system would we be having this discussion?"
Geoff sent me his email a few weeks back when the stock was 5.60, as I write it is 6.75. Geoff decided to ride his whole position, but use a tightening method, so that means a quicker exit than normal because the stock is in so much profit.
Geoff is one of the best traders I know (i can feel him blushing). Not because he has any uncanny ability that others don't, he trades a system we worked on about 5 years ago.....and guess what?
Yes, here he goes again you say....he sticks to it!
By the way, my colleague and trading friend Max's advice to Geoff was."sell it all and take your wife and family on a holiday"
Keeping the life, trading and work balance into consideration, a valid suggestion.
Don't lose your heads in this bull market, the probability is a change is coming.
Until next time
Peter
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