Losing traders all have one thing in common: They aren’t disciplined. And they aren’t disciplined because it’s easier to be undisciplined. And that’s why it’s easier to lose money than to make money. Here are some thoughts on LinkedIn (LNKD) (February 04, 2016)
LNKD
I want to look at Linkedin ( NYSE:LNKD ) today in this video, and here’s why: This is where the stock’s trading, down here, Now, full disclosure, just so you know, if you’re looking for a trade you’re probably not going to find it here. But if you’re looking for some ideas as far as how you can trade better, then maybe you want to watch the rest of this video. Here’s the deal: The company actually beat earnings estimates, butheir guidance was horrible, just really, really bad, which takes the stock down to levels that it hasn’t been to in a few years, right? You could say, “Well, we’re going to bounce here.” Okay, great! Good for you, maybe so. The point is (there are actually a few different points), first of all the market looks forward, not in the rear-view mirror. As soon as earnings are released, it’s in the rear-view mirror, nobody cares anymore. So when guidance in given and it is weaker than the market expects, it doesn’t matter how great the EARNINGS were that are just being reported, the stock is going to go down. Again, if it’s weaker than expected.
Now, lets reverse engineer this. If they guide down, but the stock moves up, then I don’t care what the “whisper” number was, and all that other stuff. If the stock trades up, even though guidance is down and it’s worse than estimates, you’re just looking at the wrong estimates, the market is reporting the wrong estimates, whatever your source is, is wrong. Because a stock will only move up in response to bad guidance, lowered guidance, when that lowered guidance is actually better than expected. Now here’s what I want to talk about in this video, I want to look at the after market, and this is really why: What I’m talking about here is risk management we’re even going to go to the 1 minute chart. What I’m talking about is this: KNOWING when you are wrong and taking action. The stock trades down here, rebounds; I’ve got 3 standard deviations here on these Bollinger Bands, the stock is not supposed to be outside these bands very long, and it wasn’t. So you’re looking at the stock coming down here BELOW 150.00, right around 150.00, and then rebounding.
Now, you are looking at this as an indication that this is the bottom, this is the low right here. You don’t generally trade in after hours because those are the “badlands”, nothing really good happens there, at least not very often. So you say, “You know what? I’m going to take a stab at this because I think this is the bottom.” Now, this is the ONLY reason you are buying this stock. The ONLY reason you’re buying it after hours is because YOU think that this is the bottom. Why” Well because 1 minute later you got a higher low, the stock is right up about where it was here; and again, this is on a 1 minute chart, but this is your thesis. So where are you going to put your stop? Well, you don’t really want to put a hard stop in there after hours because the stock kind of trades with so much volatility that you can kind of get stopped out for no particular reason other than the stock is really gyrating around. But you’re looking at this and you’re saying, “My thesis is that if this is the bottom, I want to be long. On the other hand, if this is NOT the bottom why the heck would I want to be long this pig?” It’s Match.com for professionals, the way I look at it, frankly, but that’s just me. So you buy this stock, 155.00, even 156.00, 157.00, but your stop is right here.
Now, what happens? The stock is trading up, it seems all good, you’re still okay because this is the “I’m wrong level”. And you’re okay with this pulling back a little because that’s what happens. And then this is okay too because your stop is still down here. It’s all good, you wish the stock was going up, it’s kind of what you thought; you thought the stock was going to snap back a little bit but your stop is still in place. Hope springs eternal, here you go. Sideways consolidation, it’s building a base. It’s now been trading how many minutes? Seven, eight minutes after earnings, and so it’s all good. It’s still grinding around but it’s all fine because our stop is still here. Now we’re just kind of looking at it a little bit, because you got 150.00 as a low. NOW, this stock is now down to 149.00. You’re out. Why? Because the stock fell below 150.00 and you’re entire reason for being in the trade was that this is the low. It’s not. You are out of this trade right now for like a $1.00 loss. The stock keeps going, it keeps going.
Why am I showing this? Because you didn’t get out. Because you’re looking at this and saying, “Okay it’s only a $1.00 loss, I’ll hold it a little bit because maybe the stock will turn around. And then the stock keeps going down, and then okay now it’s fine, now it’s good.” What are you dong NOW? You’re adding to your position because you’re trying to average down from this, we’ll call it 157.00. You’re trying to average down, the stock is down $5.00 below where your stop is. Your stop was $7.00 below where you bought it, 157.00, and so you will double down and then make your money back on this little bounce here. It’s all good. What a wonderful day. The stock keeps trading. You’re making your money back, you’re happy. And now the stock falls even lower. What have you done? You’ve doubled down on being wrong. You’re not wrong just once in buying here. You’re wrong twice in setting your stop here and then NOT adhering to your stop. And then you’re wrong three times by buying this. And then you’re wrong four times by not having a stop here. And the stock keeps going down. Now what do you doing about here, right around here? Here’s the moral of the story: You’re in here initially, 155.00, 157.00, whatever it was, you had a clearly defined risk of about 4 percent. Now you’re down over 10 percent. So by not adhering to your initial stop you lost even more money because you averaged down.
But here’s the other thing that happens, and this was really the key point that I wanted to make with respect to this after market very, very fast trading. You can’t even see the price here, it’s clear down here. So after you bought, after you bought and the stock starts drifting against you, what are you doing? You’re zooming out. You’re coming back to the daily chart because you want to get a NEW frame of reference. You’re initial deal was $150.00, if it falls below there, I’m out. You didn’t get out. You did what you did. It wasn’t good. Now all of the sudden, hope, again, springs eternal but fear lasts forever too, at least as long as you’re in the trade. So what are you doing? You don’t want to be wrong. You don’t want to take your loss, because when you do you’re going to be kicking yourself, because, dang it, you knew you should have sold when it fell below 150.00. And so by taking your loss at 140.00 or 138.00 or something, what you’re doing is admitting you were wrong multiple times. So you don’t want to do that. You’re looking for a reason to stay in. That is when you’re zooming out, you’re looking at levels and suddenly you’re thinking, “Well, wait a minute. This stock is down 25 percent, over 25 percent. It’s definitely due for a rebound tomorrow.” And it may very well be.
The moral of the story though, is this: When you make a trade, whether it’s after market, during market hours, whether it’s an investment, whatever the case may be, you need to have a plan for getting out of the trade. You need to know why you’re in a trade. What your objective is. What your, “Oh crap, I’m wrong,” level is. Once you know those things YOU HAVE TO STICK TO THEM. Because when you don’t, the one time that you don’t is the one time that the stock is going to keep moving against you. So lets just say, hypothetically, by the way the stock could be up at 155.00 160.00, 170.00. Who knows. This thing could reverse and move up to 200.00 tomorrow. But my point is, now you’re taking a loss to bed with you. You bought the stock after hours. It didn’t do what you expected. You doubled down and now you’re not sleeping well. And what you’re hoping is that analysts don’t downgrade the stock tomorrow. That money managers don’t just continue to sell the stock as they have done on other kind of “high flyers”. Not that this is a real high flyer here. Lets just say it’s a high P/E stock. Money managers have really taken these things down more than one notch. So you’re hoping that the stock doesn’t continue lower tomorrow. And again, feeling like a fool.
This is what I want you to be doing in the future: First of all, no revenge trading. If you lose money on this stock, you lost money on this stock. Too bad, so sad, lets move on. You stick to your stop loss and then you’re out. THEN, in the morning, if you just get a bad case of the “can’t help its”, and for whatever reason you are fixated on Linkedin ( NYSE:LNKD ), you can always be day trading this the next morning. You could trade the down gap and then if the stock starts moving upward then you can buy it, because that’s what you were doing in the after hours right now. So what you are actually doing is the same trade tomorrow morning as you were doing in the after market hours. The only real difference, frankly, is that (1) you’re not carrying a loss to be with you; (2) you’re getting a pretty good night’s sleep; and (3) you’ve acted with discipline, which is something that most traders don’t do. So don’t let these errant trades get the best of you by turning them into bigger losses than they need to be. Stick with your plan. And by the way, before you can stick with your plan, you’ve got to have one, so make one of those before you trade.
Free Chart