MY Very Important Stock Trading Lesson
When I say MY very important stock trading lesson I am specifically referring to stock symbol MY – China Ming Yang Wind Power Group Limited. Yes it’s a play on words but there is a very important lesson that I must share with you. In case you are new to this blog start here then come back.
There are several rules that Tim Sykes and his team discuss often. Cutting your losses quickly, waiting patiently and taking profits are just to name a few. However, there is one lesson that he and many of the other stock gurus talk about ALL of the time. Go in with a thesis knowing your risk reward.
What does that mean? Ok I am glad you asked. It means that you need to set your risk level and reward level as well as understand why you are about to either buy or sell a stock.
A quick excerpt from Tim Sykes’ website about risk/reward before I discuss MY very important stock trading lesson:
“All trading involves a certain amount of risk. The trick to becoming a better trader is to minimize this risk. You will often hear Tim talk about the risk to reward ratio. For example, let’s say you want to buy XYZ at $10 per share. This is a good trade in terms of risk to reward if you see the downside potential only going to $8 per share but believe the stock has an upside potential of going to $15 per share. It is not a good trade in terms of risk to reward if you think it could fall to $5 and only rise to $11.” Click here to read the full blog post on 6 tips to becoming a better trader.
Ok so if you are thinking of joining the challenge here is a lesson I learned that you might benefit from.
MY – China Ming Yang Wind Power Group Limited is a stock that Tim Sykes bought yesterday afternoon. In his alert he mentioned that it’s an earnings winner. I know from my 2.5 months of studying that earnings winners have many meanings and should never just be used as a means to buy or sell. I also know that no matter how good or bad the news you MUST respect the price action of the stock.
MY had been going up all day. In fact there was a 35% increase from day low to day high. After looking at the chart I went to yahoo finance to check out the news. Lo and behold MY skyrocketed because of (slightly better than expected) HORRIBLE 4th quarter results. HUH??? Don’t believe me? Read this. Bad earnings and the stock is up 35%??? Even though I respect that earnings winners mean different things to different people I couldn’t understand. However, no matter what I understand or don’t I need to respect price action. The price action was bullish regardless of MY’s bad quarterly results.
Then 10 minutes before the market close I got a Tim Sykes Alert that said he bought more shares of MY. WHAT??? WHY??? Listen I respect Tim and I love all that I am learning but boy was I confused. So I dug a little deeper.
I learned from this article (a month ago) China plans to increase installed capacity of wind power this year. That is good news. So mix good news with bad news and you get… who cares what you get. You have to respect price action and that is that.
In any event I came up with a thesis that the bad news was going to sink in after the HUGE run up the day before and I decided that I would short MY if it gapped up in the morning. So, I calculated my risk/reward ratio as such:
MY closed at $2.99 the day before. If it gapped to $3.08 I would sell short and cut my losses quickly if it kept going up past its resistance level of $3.18 or $.10 (RISK). On the other side I would buy to cover at $2.88 and take a nice $.30 a share or 10 percent profit if I was correct (REWARD) . My risk/reward was 1:3.
Here is what happened.
At around 8:45 am today I got another Tim Sykes Alert that he bought more shares of MY with the intention to sell into the morning gap. Remember I am a newbie and this made me nervous but happy but more nervous then happy. I was nervous because he was aggressively buying. I was happy because he wanted to sell in the low $3 range. You see I figured it would be a good thing for me if he sold into the morning gap. In essence I was doing the same thing except I was going to borrow the shares and then sell them. If you don’t know what selling short means then read this detailed definition.
Now on to the morning bell.
9:30 came and my sell short order was set to $3.08. It touched $3.07 and never hit my target price. Then it started to slowly retrace back. $3.05, $3.03, $3.00… At that moment I got another Tim Sykes Alert that he sold all of his shares of MY for a small gain. Then the stock went down more and more and more and more and finally hit $2.88. In fact it touched $2.86.
What did I do?
I kicked myself. I screamed. I then kicked myself harder. You see my thesis was right and I questioned myself. I had a thesis which is exactly what Tim Sykes wants us to learn for ourselves. However, trading isn’t an exact science and because of my nerves in conjunction with my thesis falling short of a penny (remember my target price to sell short was $3.08 but it barely touched $3.07) I chickened out and lost the opportunity for a nice profit. In fact, guess what happened to MY after I kicked myself harder. It tanked all the way down to $2.70.
Come up with a thesis, set your risk reward ratio and go for it.
If you have any questions please feel free to post them in the comment section. I try my very best to answer everyone as best as I can.