Monday, March 9, 2009

The Scourge of Traders Using Limit Orders - The Dreaded Whipsaw

My "automated" trade in DV ended last week for a net loss...about $1000. This thing is, it didn't have to be that way.....

1st Mistake - too early to jump in the trade. A couple of months ago, I began the short and got too enthusiastic in shorting more as it continued to climb rather than wait for the price to start dropping.

The result of that is DV kept rising due to my current "King Midas" power of picking stocks that seem impervious to the bad economy, which force to to actually buy back a hundred shares as it kept climbing to keep my accounts margin equity at the proper levels. I didn't panic and close my position as I still had a big position and knew the stock would eventually fall...

Which it finally did last week. Now it was time to get paid....

But.....

Crafty stock DV falls enough to activate my stop limit order then reverses and heads back up to trigger it's execution for minimal profit. Then shortly afterwards, the stock drops again and stays down.

The end result is being "whipsawed" out of my trade. What could have been an easy $3000 profit would up being about a $1000 loss....

I can only hope that that will teach me to get better at setting up my stop limit orders, as well as have my patience in waiting for a better trade entry.

The silver lining is my analysis was correct and DV did fall as planned, and the loss could have been huge if I covered my whole position when it was in its run up mode.

That leaves me with just one current position, AZO- and this is another "golden stock" defying gravity. This is going to be another tricky trade since it's taking its sweet time to start dropping, but my goal is to make this ultimately successful using options and taking advantage of the stock's volatility.

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