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Trading Lessons: Know When to Sell


How to reduce "unknown unknowns."

I received some interesting questions about my sale of Potash (POT) yesterday.

Trading is the ultimate manifestation of emotions and temptation, so I employ a method I've named the "Odysseus Strategy" -- think of how Odysseus tied himself up in order to not be lured by the sirens' song. For more on that, please click here.

I guess if I had to define it, it would be: "forced adherence to self-imposed rules."

It's of vital importance to come up with one's own personal metric in trading. Traders often have a hard time with discipline. I've previously written about how to tame your basic instincts.

Unlike big trading firms, individual investors have no bosses looking over their shoulders. Unlike institutional investors, there's no enforced rule-adherence. Individual traders have to act as our own bosses! It's imperative to be aware of this and trade in a disciplined manner with personalized rules for position-sizes, stop losses, and so on. Being a part of the Minyanville community should help. It's no wonder that people who join classes and groups have a better chance of achieving their goals, than people who go it alone.

In the late 1990s, I, like everyone else, relied on that trusted earnings jump. So this rule has been an evolution of the 2000 bear market. Since then, indeed there have been times when I've thought "this time it's going to be different for this particular stock." I've been blinded by outcome bias and felt I shouldn't second-guess this personal-trading rule.

But as a species, humans are usually so focused on what we don't have that we rarely relish what we do have. This rule has been instrumental in avoiding disastrous earnings impact.

Even though it was Monsanto (MON) -- not Potash -- that was supposed to announce its earnings, I still chose to sell my profitable position in POT, since it's been acting very weak lately. Besides, I'd added to some other rockets, as I previously shared.

And most certainly, this strategy has helped me sleep better at night.

The elder JP Morgan was once approached by a friend who said he couldn't sleep because of his large stock holdings.

"What shall I do?" he asked.

"Sell down to the sleeping point," replied Morgan.

By no means am I advocating this suggestion as a universal trading rule. As a matter of fact, fundamentalists rely on earnings to validate their thesis, and I respect their stance.

Since my time horizon is usually a few days, I try to minimize the impact of "unknown unknowns" -- and this happens to be one of them. I do remain a strong vocal advocate of adherence to rules that suit your time horizon and personal-risk profile.

The support levels on multiple indexes that I shared yesterday (NDX and Dow), offered some good (short-term) long set-ups. Many companies in the commodity space that had chipped away 20% or more in the past 7-10 trading names are bouncing the hardest today. The next 3 days typically would mark the last days for window-dressing.

And the names that could be the most affected are the ones that put in the best performance in the second quarter.

As I opined yesterday, there's resistance ahead in many indexes and individual stocks. So, while I've used up my (self-permitted) long ammo, I'm also cognizant of that other reality.

Click to enlarge

In addition, please keep in mind that we normally talk about support/resistance in absolute numbers as defined by some key moving average. But the market has been so volatile over the past few weeks that these levels have been changing -- almost on a daily basis. Because of this, it's better to rely on the concept of moving average (and switch the numbers accordingly).

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No positions in stocks mentioned.

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