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Inside A Trader’s Head. 

By Tatiana Ana Loughman 6/20/2017

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This Article Is Intellectual Property Of “Get Startups, LLC”. Please, Do Not Copy It.

“Get Startups, LLC” doesn’t give any investment, financial or legal advice.


Let me share what I think about when I trade. As you know (or don’t know yet), trading is not just buying a promising stock and wishing-hoping-praying for it to go up. Trading can be selling stocks as a start (sell-to-open), buying options, or executing complicated maneuvers through an automated trading software.

My favorite strategy (and I simply say favorite because there are really lots of them) is to find an actively pumped stock, where the company is not having much luck usually overall. Pumped,  I mean, the stock is up TODAY for any reason: news, earnings, market news, anything! I am very flexible with the reasons of why a stock can be pumped because I believe that the market doesn’t really need a reason to go up or to go down- to me, it is all one big gambling game.

Then, after I find the stock (I will show detailed steps of it bellow), I simply bet on it to go down, and also buy sort of “insurance”, in case it doesn’t.

Step 1. I go http://www.yahoo.com -> Finance -> Gainers. 

I select actively pumped stocks that have a market cap of a billion and volume of a million at least.

Step 2. I research that stock.

I make sure that the stock is up today, but is usually going down.

Step 3. I sell their shares. Also, knows as “shorting”. Also, I buy call options (2-3 months expiration would give me relatively high risk, but I will take it) as “insurance” just in case my prediction was wrong. If you are not comfortable with high risk for your “insurance” options, then go with the low risk and buy calls with an expiration farther away. How much to short the stock and how much to buy options? See how much max (approximately) you may lose if your shares will start going up and take that loss into account while buying calls options.

Step 4. I check within 2-3 days if the stock keeps going up. If so, I may sell my options in a week-two (not later, because then the options value will be dropping due to time expiration) and so that way I take my profit.

Step 5. I wait for a while (usually at least a month and max several months) for the stock to start dropping, then take my profits from the “shorting”. If you went with the low-risk options strategy,  you may be comfortable waiting longer. Just remember that options will start losing their value due to time after holding them for over approximately 25% of their total time. Also, it is critical that you understand that holding your “shorted” shares gives you unlimited risk. “Insurance” or the options that we bought counterbalances the risk.

Bellow is the comparison of what happened with my call options within a week:

They went up 15- 25%.

Exit entries are the most challenging ones. You want to maximize your profits, but you don’t want to wait too long and so it will simply become too late to make any profit. What I like to do is to “lock” my profits. In the beginning,  I try to calculate the best exit for both entries,  relying on graphs and minimum realistic possibilities. Then, if my entries (each at the time) hit the targets (the ones that I set IN THE BEGINNING), I simply set a stop loss order, which executes a trade in case the stock or the option start moving in the opposite direction. Having tight or loose stop loss orders are your personal choice. I like to move them up if my options move up or move them down if my stock moves down, to tighten them up. You can also set orders for this specific action.

Some traders prefer to limit their risks and not to anticipate a decision of where to see their options and stocks (basically making a decision that the exit is the highest/lowest point). They exit the two directions (the stocks and the options) when the trade of the combination becomes profitable. In other words, the options gain exceeds stocks loss or stock gain exceeds options loss.

Step 6. It took a little over a month for the stock to start dropping. I bet lots of bullish investors are having a panic attack today, but not you, who took this trade in a completely different strategical direction.

Stock Market Chart

This is where you are about at a break-even point. It really depends on what your risk tolerance is. You may (1) start setting stop losses, (2) wait until it goes lower, (3) buy to cover as soon as you make even a small profit, (4) or get emotional and buy to cover at a loss (break-even overall), (5) buy-to-cover a portion of the stock (break-even point) and wait for the other half to keep going down to take the pressure off.

And we are continuing to go down as traders’ fear goes up.

Stock Market Chart

So, what did happen on May 11th, 2017 for the stock to drop that much? Overall negative economic sentiment and/or Maybe (!) the fact that the Ex-Dividend Date is on May 11th, 2017. Traders prefer to short (sell-to-open) stocks after the Ex-Dividend Date, so they don’t have to pay dividends. Could that be that the stock was heavily shorted after the Ex-Dividend Date and prior to the Earnings at the end of May 2017?

 

Capture3

Stock Trading Info

May 31st through June 5th earning didn’t happen and I was actually in a big loss. The stock was going up steadily due to overall economy being optimistic.

Earnings announcement occurred on June 20th, and as I thought, the company had a loss in earnings. As bad as it sounds for Bulls, I was finally happy. And, remember, you can not predict future! This is exactly what I’m saying, you are actually hoping for your estimates to be true. So, we are where we were in mid May again, but this time, I have stronger estimates that the stock might be going down.

Stock Market Chart

And there it is. Finally, I’m in a profit from both: the call options and shorting the stock. My next step, step 7is to start buying to cover in portions: 20% – 40% of total shares each time. My strategy is not to commit to a decision 100%, but instead diversify. In this example, that would be buying to cover in portions.

On the next chart you see that SFUN is now priced at $3.19, which is lower than what we sold it for.

Stock Market Chart

I prefer to invest approximately 10-15% in one position. I also like to practice in http://www.thinkorswim.com (simulated trading) trading platform, where I can simply learn and experiment without the risk of losing everything. Also, check out http://www.tradestation.com if you would like. You can paper trade with them as well as try and purchase sophisticated auto trading platforms.

Please, remember that stock market is a game and, after all, businesses don’t want to buy back their shares at prices higher than what they sold them at. 

“Get Startups, LLC” doesn’t give any investment, financial or legal advice.


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