Here’s how I lost money on Spotify (SPOT)…and feel good about it. (April 19, 2018)


I want to look at Spotify ( NYSE: SPOT ) today and this is why: This is a trade that I lost money on today and I thought it would be instructive for people to understand what happened; it is a small amount of money but I will explain the trade.

I had said early in the morning today that I was taking a small position in this stock because I wanted to be there a bit early if the stock was going to break out. You could see where it traded yesterday; we’ll say above 156.00 was where the stock was trading. It opened down a bit, not a lot but a little bit, and started to move up essentially just about the high of the day, 155.00 was the high of the day. And I said, “You know what? I am going to start a small position and I will add to it if the stock starts breaking above yesterday’s intraday high.” Now, you can say, “Well, that was kind of stupid because you should have waited.” And as it turns out that would have been the trade but we don’t always do things the right way that always works out.

I wanted to explain this because one of our members, when I said, literally 2 minutes after I posted that in the forum, I said, “Don’t buy Spotify ( NYSE: SPOT ).” And then I went and closed the trade out for a loss of pennies. So she had asked me to walk her through it, so here I am.

Here’s the deal: When I am looking at a stock like this, I will just walk you through my thought process, A high profile stock, IPO, you can see what happened. We have a lot of resistance here, above 160.00 certainly. But the stock had been trading; it came up here to test 156.00 and ultimately failed, then it was back here yesterday. I thought, IF big traders are taking this stock, you know it is on a lot of watch lists; it is on the radar of a lot of folks because it is a high profile IPO. And I will say this, if it does ultimately break out above 157.00 you are going to see a lot of traders coming for this stock; that is just what happens.

The idea was that if big traders are coming for this stock it is going to move out to a new high. I am not sure whether they are going to do it or not but that is my sense. It looked like it first thing in the morning that this could actually break out. So I took a small position, frankly to get a head start on it. It is like trying to get an early start when you are running the 440 hoping that the guy with the starting pistol doesn’t see that you got an early jump. Well, he called me on it and I had to go back to the blocks.

My thesis is, big traders come for the stock; it moves up to a new high. Here is what you don’t want to do: The stock doesn’t do that; you don’t want to stick with a trade and say, “Well maybe big traders will come later. Maybe they are just on their coffee break. Well, actually it’s made two higher intraday lows. So now it is a third higher intraday low so maybe I will just stick with the stock anyway.” No, that is not why you get in this trade. That is not why I got in the trade.

In other words, I got in the trade with a specific thesis; that if big traders are coming for this stock I will know it not because they are pinging me or tweeting it or whatever they do on “stock twit”, not because of that. It would be because I will see the stock move higher. Well, when it doesn’t do that what you DON’T want to do is sit around and say, “Well okay, let me find another reason so that I don’t have to take an 8 cent loss.” You say, “My thesis didn’t pan out. Fine. No problem. What’s a Spotify ( NYSE: SPOT )? I don’t care, I was trading the chart.” And then you move on.

Here is the moral of the story: You will find that if you have an identifiable and easily articulable thesis; in other words, if you can describe it in three sentences, you will find that your trades will be better. Because you will know why you are getting into something. And if you know why you are getting into something then you will also know when you are wrong and when you are right. You won’t have to sit here and scratch your head.

Trading doesn’t have to be difficult. It doesn’t have to be complicated. It is our brains that make it complicated. You have to be good and disciplined at what you do. Absolutely; you have to know the market. You have to have a lot of experience at this. I think a lot of traders make trading much more difficult because they get attached to this idea of being right. If you can instead say, “I am right about my thesis I just don’t know if it is going to play out.” In this case it didn’t play out. I got out, I took again, about an 8 or 10 cent loss on the trade and that is all.

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