Wall Street’s Dirty Little Secret

Wall Street’s Dirty Little Secret

The truth is that no strategy comes without losses, and learning from losing trades and making adjustments is the key to long-term profitability. Here are four losing trades and lasting lessons from each.

Did you get the check for $17,856? I am amazed at the number of e-mails that I receive touting a “sure-fire” trading system, and there is always a common theme among these e-mails: “Never any losers!

Just yesterday, I was offered the next winning “66 trades for free.” Reading further, I was disappointed to learn that I would not double or triple my money on every trade. Why can’t I just pay for those trades that would double, triple, or more?

I am hoping that only a small number of investors are naive enough to think that there is a financial analyst, newsletter writer, technical analyst, option hotline editor, or televangelist who has never had a losing trade and is more than happy to share his winning secrets.

This is Wall Street’s dirty little secret, as successful investors and traders know that everyone has losing trades. I have often felt that some of the best learning experiences come from losers, and therefore, in the spirit of disclosure, I am going to review some of my losing recommendations from the past months to see if there is something that can be learned from them.


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Chart Analysis: On January 26, I discussed the overall bullish outlook for the stock market, and particularly the materials sector, which I though would benefit from additional strength in the US economy. One of my recommendations was AK Steel Holdings Corp (AKS).

  • AKS appeared to have completed a reverse head-and-shoulders bottom formation, as it closed above the neckline (line a)
  • Relative performance, or RS analysis, was in a short-term uptrend, line b
  • Daily on-balance volume (OBV) had been rising from the October lows, line c, and volume increased on the close above the neckline
  • My recommendation was to buy on a retest of the breakout level
  • The first buy level was hit the next day, and the second buy level was hit six days later
  • AKS proceeded to decline steadily from the late-January highs, and on February 9, the uptrends in both the RS line and the OBV were broken
  • Four days later, the stop was hit (see arrow), resulting in a 9.6% loss

In a leap-year column, I discussed the bullish outlook for stocks in March and pointed out the heavy volume surge in the semiconductor stocks. One stock I liked then was Cavium Inc. (CAVM), which had just broken above weekly resistance (line 2).

  • The RS line had broken its year-long downtrend, line e, and appeared to have bottomed (line f)
  • OBV was acting much stronger than prices and shows a bullish uptrend, line g. It had also moved well above the 2011 high
  • On February 29, CAVM dropped in late trading to close on the lows, and the buy level was then hit
  • As the updated candle chart indicates, CAVM continued to decline, closing the week on its lows
  • The stop at $34.78 was hit the following week, stopping longs loss out for a loss of approximately 4%
  • One week later, the OBV broke its uptrend (line g), and this was followed by a break of support in the RS line
  • On April 10, CAVM made a low of $28.10, which was 19.2% below the stop at $34.78

NEXT: A Failed Seasonal Pattern and Negative Earnings Surprise


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On February 20, I discussed the historical seasonal pattern for Baker Hughes Inc. (BHI), which was derived from data going back to the 1980s.

  • The daily chart showed a potential short-term bottom formation, line b, which suggested that prices could break out above resistance at line a
  • I noted that the RS analysis had turned up but was still below its downtrend, line c
  • OBV was much stronger, as it had formed higher highs and higher lows. Volume had increased over the past few days
  • In early March, both recommended buy levels were hit when BHI made a low at $46.76 on March 6
  • The RS line dropped to new lows on March 13 when support at line d was broken
  • Daily OBV had dropped back below its weighted moving average (WMA) by March 6, and after BHI moved sideways for another week, it dropped below the uptrend, line e
  • The stop level at $45.28 was hit on March 21, stopping out longs for a loss of approximately 8%

On January 19, I discussed the bullish formation in the Nasdaq 100 Advance/Decline (A/D) line and what it meant for the technology stocks. I focused on the high volume in the semiconductor stocks and specifically identified SanDisk Corp. (SNDK).

  • The daily chart showed that SNDK had just broken out of a flag formation, lines f and g
  • This suggested that the pullback after the completion of the reverse H&S bottom formation was over
  • RS line had broken through its downtrend, line h, but had formed lower lows
  • OBV had broken its downtrend, line j, and formed higher lows
  • Three days after the article was posted, both buy levels for SNDK had been hit
  • On January 26, SNDK reported lower-than-expected earnings and issued a disappointing forecast for the current quarter
  • The stock then gapped lower by more than $3 and eventually made a low of $45.43, which was just above the stop at $45.38
  • Over the next nine weeks, SNDK managed to rebound, eventually hitting at high of $51.80. I kept moving the stop higher and was stopped out at $48.42 on March 23 for an approximate loss of 5.4%
  • This week, SNDK made a low of $40.57

What It Means: In order achieve positive long-term performance, it is essential to limit the amount of any individual loss. One or two large, 20%-30% loses in your portfolio can take years to recover from, and the amount of risk should be determined before any investment is made.

So what are the key takeaways from each of these losing trades?

AK Steel Holdings Corp (AKS): The continued deterioration in the technical studies after my buy levels were hit should have spurred me to get out in the $8.50 area. Alternatively, a tighter stop placed under the January 24 low of $8.76 could have been used.

Cavium Inc. (CAVM): The reversal on the weekly chart after the position was established was a clear sign of weakness, but the daily indicators did not really break down until the stop was hit.

Baker Hughes Inc. (BHI): The bullish seasonal outlook for both crude oil and BHI encouraged me to anticipate an upside breakout. When it failed to develop, the sideways action was a good reason to tighten the stop to, say, $46.56, which would have limited the loss.

SanDisk Corp. (SNDK): The negative earnings release was clearly not something that I expected, and simply staying out would have been the best strategy. After the trade was established, it was managed fairly well, and the stops were continually raised to reduce exposure. In hindsight, closing out the position once SNDK moved back above $50 would have been an even better idea.

Here’s hoping this discussion will help clarify some of the realities of investing and trading and improve your long-term performance!



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