Arm Holdings PLC (ARM) - Post Trade Review
ARM is an example of a recurring mistake that's been plaguing me for the last couple of months during this phase of the market
The reason this trade is making it into the Lessons section is because it's another example of a mistake that's been recurring throughout the last couple of months in a number of trades.
What provides consistent profits in any good trader's system is his situational awareness of the overall market conditions. Trading on technical analysis alone without knowing the macro environment and bigger picture, is like you showing up in your bathing suite and flip-flops when someone asks to meet you at the beach in January! This is kind of like how this trade has gone for me...... I was looking at the TA and not consciously thinking about the environment and planning accordingly.
My trading system has been telling me for months that this is not a full-send, all-systems-go environment. Breadth is declining, 56% of stocks are in a Stage4 downtrend, the equal weight S&P (RSP) is below it's 50 day SMA and my feedback was telling me buying stock on extended breakouts was not working. The environment was calling for accurate stock picks in strong groups that are few and far between, good selection is the name of the game.
Taking the trade was not the mistake, in fact, this was one of the better entries I've had in a while and I was very happy about the timing. I entered just as it broke a tight consolidation on increased volume and 2 days later it broke through the pivot and formed a big gap. I was very happy with this and it put me in a very good position for this trade. However, this is where the mistake was made:
I usually start with a pilot entry, I hardly go full position with the first entry (unless the risk is REALLY tight), so I always try and add to my position somewhere on the way up at a good low risk entry point. In this case I waited for price to come down on low volume, which it did and then looked for an entry on the 5min timeframe, which I did, good right?!?!? NOPE! In a bullish environment this would've been the right call, but we were not in that environment and I've seen time and time again over the last couple of months that follow-throughs are very rare and extensions are pulling back instead of basing. But nevertheless, I ignored this and entered near the top of that move.
To keep the risk tight, I placed a partial stoploss just below the low of the day, just in case. The next day the price gapped down on open and stopped me out lower than my stop-loss. Because I added to my position higher it increased my cost basis for this trade, and now I had to raise my initial stop to keep the total risk for this trade within my limits. ARM has now pulled back to the breakout area and the 50 day SMA and stopped me out.
I'm out of the trade with only a 2% loss on the trade and less than 0.25% of my portfolio. Yes, it was good to limit the loss to that low number, but I'M OUT OF THE TRADE and messed up a super good entry. I don't know what's going to happen next on this trade, but instead of keeping my original entry with my stoploss at breakeven and the possibility of adding more to the trade as it bounces of this 50SMA with a low risk, I've become a spectator and might see it rocket up from here.
The lessons I'm taking from this trade are:
- Consider the environment and plan trades accordingly
- Don't be too hasty to add to positions. The trade must prove itself before adding more capital to it.
- In a yellow light environment, trades are more prone to pullbacks so buying extended breakouts is a no-go.
- Be patient, there is plenty of time. Leave FOMO at the door
Off to find the next one..... that's the beauty of the market.... there is ALWAYS another trade
This is my own trading journal. It is not investment advice, it is not a recommendation to buy or sell any security, and it is not tailored to your circumstances, your objectives or your risk tolerance. I am not registered as an investment adviser, dealer or representative with any securities regulator. Trading involves substantial risk of loss and most active traders lose money. Do your own work and speak with a registered professional before acting on anything you read here. Full disclaimer.
