Three Trades You’d Never Expect to See Again

You never know when trouble will strike.

And it can all happen at lighting pace.

I had a lesson in this last week…and it was scary. A normal day became an emergency in the space of minutes. It reminded me how fortunate we are when things are good.

But it was also a reminder of something else. Bad results can have good outcomes.

Yes, I know this sounds odd. How can something bad be good?

It all comes down to perspective. The key is weighing the result against other possibilities.

Let me explain what I mean…

Last week, we had a family trip to the movies. It’s always a fun experience. The kids get a kick out of the big screen and my wife and I enjoy hanging out with them.

This time was no different. Everyone had a perfect morning. We all arrived home happy, and ready for the afternoon.

But it didn’t stay that way for long.

About an hour later, my wife complained of feeling a bit off. Within 15 minutes she had a raging fever. A few minutes after that, she was throwing up and reeling in pain.

The situation was spiralling out of control. There was only one thing to do — go to the hospital.

You may recognise the symptoms. About one in 20 people have a similar experience. The condition was acute appendicitis — an inflammation of the appendix.

My wife underwent an operation the next day. She’s recovering well and will be back to normal in a couple of weeks.

This was a bad situation with a good outcome.

First, the appendix didn’t rupture — that could have been dire. Second, we were close to a first class medical facility. We often happen to been in remote locations this time of year.

It’s easy to imagine a much worse outcome.

Here’s the thing. Bad things happen — there’s no getting around that. It’s what happens next that often matters most. This can mean the difference between setback and disaster.

Bad result, good outcome

The stock market is no different. Unpleasant surprises are an unavoidable reality. But these can also have good outcomes. It all comes down to how you manage the situation.

I want to talk about three of Quant Trader’s best trades. No, I’m not going to showcase some of the stocks that are up more than 100%. We’re going to be looking at trades most people try to forget.

The first stock is the litigation funding firm IMF Bentham [ASX:IMF].

Here’s the chart…

Source: Bloomberg

Click to enlarge

Quant Trader gave a buy signal at $2.20 on 28 November 2014. There was a second signal at $2.43 on 12 February 2015. The trade’s exit point was at $1.98.

Have a read of what I said at the time…

I always find it interesting to study the chart at the end of a trade. It often reveals details that can help in the future.

This trade took a couple of months to get going. That’s not unusual. The market operates on its own timetable — not ours.

Once the rally got going it was fast. The upward trend was strong. And this was the trigger for a second buy signal.

Quant Trader works on the basis that a trend is likely to continue. But this doesn’t always happen.

IMF’s advance began to stall soon after Quant Trader’s February entry. A routine correction quickly became a larger sell-off.

Quant Trader’s strategy in this type of situation is to cut the position. No one knows how much longer this decline will last. And Quant Trader doesn’t hang around to find out.

Many traders put off the decision to sell. They tell themselves that the shares will eventually come back. Maybe IMF will quickly recover. But it could also keep falling.

Quant Trader gives a stock room to move — you can’t ride a trend without doing this. But you need a ‘line in the sand’…a point where you walk away.

IMF is now at the walking point. It’s time to preserve capital and move to the next trade.

The third last paragraph notes a key factor to successful trading. It’s why many traders fail — they let a bad event turn into worse outcome.

Here it is again:

Many traders put off the decision to sell. They tell themselves that the shares will eventually come back. Maybe IMF will quickly recover. But it could also keep falling.

IMF didn’t recover. Anyone holding and hoping has lost a lot of money.

Quant Trader took a loss on this trade (10% and 18.5% respectively). But it was a good outcome. Stubbornly holding would have seen the losses blow out to 49.8% and 54.5%, and counting.

The next example is a resource company — Independence Group [ASX:IGO].

Source: Bloomberg

Click to enlarge

IGO’s buy signal was on 2 December 2014 at $5.27. The exit from this trade was at $3.75.

Many traders convince themselves a losing trade can’t get any worse. But it can. I know, from hard won experience. Hoping things will get better can lead to disaster.

IGO resulted in a 28.8% loss. A strategic exit eliminated the possibility of staying on-board for a 60% decline. Again, this was a good outcome.

I have one more trade to show you. This one is for Capital Health [ASX:CAJ].

Source: Bloomberg

Click to enlarge

CAJ first entered the portfolio on 23 December 2014. There were two signals in total. The respective levels were $0.74, and $1.00. Quant Trader’s exit was at $0.74.

This trade follows a similar pattern to my family emergency. CAJ got off to a strong start. It was looking like a top trade in the making.

But it didn’t last. The stock took a sharp turn for the worse. There was only one thing to do — cut the position.

As I said earlier, bad things happen. It’s what happens next that often matters most. Like my wife’s condition, this trade could have been so much worse.

Many people think trading is all about profitable results. But there’s more to it. You also need good outcomes when things go wrong. Cutting losses is vital.

Winning trades can also turn south without warning. We can’t do anything to prevent that. But we can secure the best possible outcome. This separates a good trader from the pack.

Until next week,


Editor’s note: Did any of your stocks hit multi-year highs this week? Chances are the answer is no. And that’s understandable…the All Ordinaries is well off its peak. But some stocks are surging. They could make a big difference to your portfolio.

Take Australian Pharmaceutical Industries [ASX:API] for instance. You’ve probably never heard of this stock, but last week it hit a nine and a half year high. And that’s good for Quant Trader’s members. You see, Quant Trader has signalled this stock three times since December 2014. The signals are now up 123%, 73%, and 42% respectively.

Anyone can get gains like these. It’s all about having the right strategies. You can learn more about these here. You’ll also read about a very special limited time offer!

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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