A picture-perfect Sunday beckons.
The skies are clear, and the glow of sun filters through the trees.
Most folks are slowly stirring from a good night’s sleep. The promise of sitting back with a coffee seems like an ideal way to roll into the morning.
But not for everyone…
My day began at 4:30am with a buzzing alarm clock. I roll out of bed in a daze. It’s dark, cold and uninviting — not exactly how you’d want to begin the day.
So why would I do this?
Well, I’m about to join more than 37,000 people pounding the city’s pavements.
You see, a few weeks back, it was the Blackmores Sydney Running Festival. It attracts everyone from kids to grandparents, and I’ve been a regular for years.
There are several events on offer. These range from a 3.5 kilometre dash over the Harbour Bridge, to the marathon’s gruelling 42.2 kilometres. My race was the endurance classic, the half marathon.
So what does early morning running have in common with trading?
I’ll get to that in a minute.
But first, let me tell you a story…
Pacing is not an exact science
Of all the running events I do, this is one of the most spectacular.
Starting beside Luna Park, the course takes runners over the Harbour Bridge. It then weaves through the city streets, taking in sights like Hyde Park, The Rocks, Barangaroo, and the Harbour.
The scenery is a blur for most people. They are too busy running themselves to exhaustion.
But not for me.
You see, I had an official job to do — I was one of 16 pacers.
Now, a pacer has an important role. They help a group of everyday runners achieve their goal race time. This means setting the pace and offering loads of encouragement.
My pacing group was the 100-minute runners. These people aim to complete the 21.1 kilometre course in less than one hour and 40 minutes. And it takes a lot of planning to get them there.
But pacing — like trading — is not an exact science. I always lose a portion of my group along the way. Some falter on the hills, while others fade in the final few kilometres.
No matter how hard I try, I know I can’t get everyone over the line.
The finish is always a highlight. It involves a 300-metre dash through Circular Quay to the Opera House. Cheering spectators spur on the runners for a final surge. It gives me a buzz every year.
With the clock counting down, I hit the line with the last of my group.
Our time was 99 minutes and 56 seconds — barely a moment to spare.
Backslaps and congratulations follow. Elation briefly trumps exhaustion.
And then it happens…as it does every year.
Someone asks the question: How do I pace within seconds of the target?
Well, it largely comes down to preparation. I practice the goal pace in the weeks before the race. I also calculate what the race time should be at each kilometre marker.
But no matter how well I plan, I never know who I’ll get over the line. Some runners reach their 100-minute goal, while others don’t. The individual outcomes only become clear at the end.
As I said before, pacing is not an exact science. My race strategy won’t work for everyone.
But if I stick to my plan, I know I’ll help more than a few runners hit their mark.
So what’s the connection with trading?
Well, let me tell you…
A strategy to help you be a better trader
Trailing stops follow a similar logic.
Just like pacing, they:
- Are not an exact science; and
- Won’t get the ideal result on every occasion.
But if you use them with consistency, a trailing stop could make a big overall difference.
Check this out:
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Costa Group Holdings Ltd [ASX:CGC] is a recent profitable trade. Quant Trader gave a buy signal in November 2016. The system then rode the trend until earlier this year.
Now, have a closer look at the chart…
You’ll see a red dotted line below the share price. This represents the trailing stop. The system exits a trade when the share price touches the line.
CGC hit its stop on the day the shares made a lasting low. Had the trailing stop been set at a lower level, the stock would have remained in the portfolio.
I sometimes get emails when this sort of thing happens. People tell me about the frustration of selling a stock, only to see it quickly rebound.
Yes, I know exiting near a low is disappointing. I’ve done that many times in my career. I believe it’s something all traders experience from time to time.
Unfortunately, there’s no way to fine-tune an exit stop to perfection. We only know how to tweak the levels in hindsight. Real-time trading doesn’t offer this luxury.
Some people question the value of stops. They highlight trades like CGC and say it’s better to ride out the pullbacks. They reason that a stock will eventually bounce back.
It’s a bit like saying a pacer should slow down for a struggling runner. Maybe their goal is still reachable. They could be about to get their second wind…
But what if they don’t?
Have a look at this:
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Some stocks — like runners — just keep fading.
Worse still, a few crash-out completely.
Blue Sky Alternative Investments Ltd [ASX:BLA] was one of the ASX’s best stocks this decade. The shares rose over 20-fold (or 2,000%) between 2012 and November of last year.
Quant Trader’s most recent buy signal was in June 2016. The system rode the trend for 21 months, finally exiting in March this year, just four months after the all-time high.
Now, here’s the thing…
Some traders are reluctant to sell a faltering stock. I hear them say ‘I’ll just give it a little bit longer’. They believe a stock will get a ‘second wind’ if they give it time.
But this could be a huge mistake.
You see, the longer you delay selling, the harder it can become. I often hear of people riding a stock all the way to zero. They cling to the hope that a recovery is around the corner.
Some people will regret selling CGC. They’ll look back on it as a mistake.
But it’s this same discipline that gets them out of portfolio wreckers like BLA.
There’s no doubt in my mind: you must cut your weakening stocks loose.
I believe it’s better to miss a rebound than risk riding a stock all the way to the bottom.
Until next week,
Editor, Quant Trader
PS: Free Report: The five most potentially lucrative income stocks trading on the ASX right now. Get all the info here.