Anatomy Of A Trade

I’ve been asked by my investment group to present an anatomy of a trade I made last month.  It was a trade based on a company with a good business model but trading on what I can only say is a lot of hype.  A dangerous combination but the plan and the rules I followed can apply to any trade or investment.

The key to any successful trade is having a plan and following your rules.

For this example, depending on how one looks at it, I broke at least one rule and followed many others.

Wednesday November 8th:

ROKU closed at $18.84 per share.  They were due to report their first quarterly report since going public and most everybody was pessimistic.  The company had yet to make money and were set to continue their losing streak.

I considered them a popular, trendy streaming, cord cutting alternative product that had a good business model.  I have been exploring cutting the cable cord and have purchased a long range HD antennae as well as one of ROKU’s streaming sticks.  The tech is not what impresses me.  In fact, they are practically giving it away.  That is not where they plan on making their money.  Roku intends to make their money on programming and selling advertising.  In order to do that successfully, you need market penetration.  Roku is making their hardware cheap to get it into people’s homes and build up market share.  But Roku is also teaming with HDTV makers and having their streaming service imbedded in today’s popular smart TV’s.

If you think about Microsoft in the early years of the PC, they basically gave away the OS so that they could gain market share and sell software and ultimately services.  ROKU is attempting to gain market share with the adoption of HD 4K smart TV and imbedding their platform (the OS) in each TV sold.  From there, they focus on selling content and advertising.

So I was really torn.  On the one hand I really liked the company.  On the other, they were still young and had yet to prove that they could succeed in this highly competitive online content streaming world.  So I held off on buying until I saw which direction the stock moved based on their report and outlook.

Well, it turns out that ROKU is still not profitable but they lost a lot less than expected and absolutely killed it on user activations and loyalty.  So much so that ROKU even tossed out the possibility of becoming profitable as soon as next year.

What happened next was Simply Amazing.

Thursday November 9th:

ROKU opened at $24.75.  A 31% increase over the previous day’s close.

I bought 100 shares.

Here are the rules I broke.

  1. Chased the money
  2. Bought after the stock had already passed profit taking zone. (see notes below)

Here are the rules I followed or (at least) did not break.

  1. I bought on volume.  Institutional confirmation
  2. I bought at an early entry point below the buy point.  IBD had the buy point at $30 per share based on previous highpoint shortly after initial IPO.  But this early entry is OK based on institutional buying.

Yes, these rules are a little fuzzy and subject to interpretation.  Here is my point of view.

Depending on how one looks at this, from an IBD perspective, I may have broken 3 rules…. or not.  Technically the profit taking zone (20% – 25%) is after a breakout past a buy point.  Sometimes it is OK to buy a small position before a buy point if institutional buying is there.

As soon as I bought my shares and saw that they did not stage a reversal, I placed a trailing stop.

Rules I followed:

  1. Protect capital and gains.  At this point I was protected from taking a loss.  –  Unless the stock happened to gap down at the next open….

Friday November 10th:

I canceled my trailing stop and sold 50 shares shortly before close at $35.16 for a 41% profit.

Note: The stock closed at 33.21 which would have been below my trailing stop, but because I had cancelled it to sell half my gains, I still had 50 shares invested.

Rules that I broke:

  1. Changed my rule of setting and keeping my trailing stop to protect profits.

Rules that I followed:

  1. But this was done to protect my profit from the downside risk of a gap down.

I reset my trailing stop right before close.  I fully realized this would not protect my remaining shares from a gap down on Monday’s open but I truly believed that the “hype” was not over.  After all, we still had all the weekend traders (those who only follow the market and their stocks on the weekend).  Sure enough, there were many articles hyping the breakout stock.  Even IBD got in on the action and published a “hype” article.

Monday November 13th:

No gap down at open!  Hype and irrational exuberance was still in full force!

But even hype has it’s limits and …

Sometime during the lunch hour my trailing stop got activated for $45 a share.

And… I was out with a 81% profit on those remaining 50 shares.

And an overall profit of 61%.


Lessons Learned:

Rule #1 to investing is not to lose money.  Or at least minimize your losses.

  • I utilize trailing stops on almost all my trades.

Rule #2, see #1  😉

  • But seriously, I also use trailing stops to protect my profits.
  • Yes, I sometimes get stopped out of a stock on a sudden drop or as those who think of conspiracy theory, on a sudden drop by MM to flush out weak hands.  But, hey I usually make a profit and if I still like the stock, I can always get back in.

Rule #3 I base a lot of my buy and sell points on percentages and not dollar values.

  • For me this is a pure psychological rule.  I learned early on that I could get hung up on “making money”.  Sometimes people start seeing all the $$$ signs and let their emotions rule their investment and trading decisions.  I am no different.  So I try and base all my buy and sell decisions on percentages.
  • Do I ever sell too early and miss out on future gains?  Yes, but if my goal is 20% profit, then I am happy.  Would you be happy with a 20% gain on your investments?  The percentages are there to manage risk and avoid letting my emotions (such as greed) take over.
  • Do I ever sell too early and get stopped out of a loss before the stock recovers?  Yes, but not all stocks immediately recover and the stop loss is there to minimize my losses and protect my capital.

Rule #4 is you need money to make money.

  • Don’t lose all your hard earned money to the stock market, irrational exuberance, or emotional trading decisions.
  • Follow rules # 1 and # 2.



Should I Roll Over My 401K To An IRA?

After four years with a Big 5 IT consulting company, I am leaving for a small IT company.

In many ways, I am getting back to my roots working in a fast growing IT firm doing the things I love most, Network Operations and Network Management.

I will be starting my new gig this coming week.

I originally hoped to write a post about negotiating a new salary but as things turned out, there was not all that much negotiation done.

Basically I got most everything I asked for.

  • I got a career opportunity with a company and a CEO I am very happy to work for.
  • I got a salary increase I am happy with.
  • I got a benefit package . . . well to be quite frank, is just OK.

That is where what little negotiation there was really happened.

  • The health plan for me and my family doesn’t change but the cost is a bit more.
  • I get less life insurance, so I have to purchase my own plan.
  • There is no commuter reimbursement program either, so my commuting expense will increase.

Since I would need to spend a bit more money to “purchase” benefits and coverage I was losing, I countered by asking for a signing bonus to help make up for this difference. Normally I would ask for more salary but I already priced my salary request on the high end of my range simply because I was expecting to receive a lower offer and then “negotiate” back up.  But as I said, they gave me what I was asking for so I asked if there was a signing bonus plan available.

Recruiters and HR departments sometimes keep this out of the initial offer.

I was told by the CEO they do not offer signing bonuses. Reason being that it is basically giving money for work that hasn’t been done yet. So he countered by including me in the management incentive plan which basically states that if the customer is happy, the company gets a bonus which gets divvied up on a quarterly basis. If we exceed our contract goals, this would make up for any added expense I am incurring.

Did I mention I really like the way this CEO thinks. Countering with a pay for performance management bonus instead of handing out a bonus for not really doing anything. He seems to be tough and fair with a good dose of practicality.

So that left me with the decision of what to do with my 401K.

I am an active investor with my regular investment fund (non-retirement money), but when it comes to my 401, I am as hands off as one can get. I try to diversify and then basically look at it once a year to see if I need to do any rebalancing.

The new company 401k does not become eligible for 90 days and quite frankly is much like their other benefits. Not great but OK.

I took a snap shot to illustrate and show where I am now.


Overall, I cannot complain with my current 401k allocation.  Though from what I have read, most financial advisors might say my allocation does not match my age (55). Maybe when I retire I will look to be more conservative but until then this has pretty much been my retirement investment strategy for the past 20 plus years and over all it has served me pretty well.

So what are the advantages and disadvantages of keeping my money where it is vs rolling it over?

  • The advantages are that performance has been really pretty good and I don’t think I am getting killed with fees.  For the moment, I have good access to the money.  401K accounts are better protected from law suits than IRA accounts.  (not that anybody ever plans on getting sued, but you never know)  You can, in moments of desperation, take a loan out against a 401K.  And 401k’s have the option of taking money out without penalty at 55 instead of 59 and 1/2 which is the age set for IRA.
  • The disadvantages are that if the management company or funds changes I may not have the easy access I currently experience and may not like the allocations available to me.  I cannot continue contributing to my former employers plan. And, though the investment selections are good, there are not as many as I would have with an IRA.

My other concern is that I do not want to start spreading around my retirement monies into several 401k’s.

I like keeping things as simple as possible. So my choices seem to be:

  1. Wait 90 days and roll over the money to my new employers plan even though it is not as good as my current one.
  2. Keep what I currently have where it is.
  3. Roll it over to an IRA (I would probably choose TD Ameritrade simply because that is where I do most of my investing now) I know there are other players out there like Betterment and Wealthfront but that would mean being less simple and having multiple brokers.

What do you think?
Which option would you choose?

Swing Trading

IBD has a relatively new investment service called Swing Trader.  Now, to be fair, there is nothing new about swing trading.  What makes this slightly different is that their swing trades are based on IBD CANSLIM investing.

What is CANSLIM?

It is an investment system based on both fundamental and technical analysis.  CANSLIM is an acronym for the seven traits winning IBD stocks have before they breakout.

  • Current Quarterly Earnings – increasing quarterly sales
  • Annual Earnings Growth – at least 25% or more for the past 3 years.
  • New Product, Service, Management or Price High
  • Supply and Demand – high demand for limited supply of shares.
  • Leader or Laggard – industry leaders with superior earnings and sales.
  • Institutional Sponsorship – funds account for 75% of all market activity.
  • Market Direction – 3 out of 4 stocks follow the market’s trend.

IBD has a 30 day free trial for their Swing Trading service.  I decided to sign up.  Not necessarily to spend even more of my hard earned money but rather to see exactly how well they are doing.   To be honest, one could consider some of my trades swing trading.  My style of investing is quite similar to IBD in that I look for good technical setups and momentum trends of well-run or popular companies; but above all, when it comes to truly short term trades, I look for opportunity.

Case in point, some of my more recent trades were based on what I thought was opportunity.

  • When Amazon announced buying Whole Foods, and selling SEARS Appliances; Home Depot, Walmart, and Best Buy took a price hit yet recovered quite nicely.
  • When Disney announce they were leaving Netflix, NFLX took a price hit, and interestingly enough, filled the gap from their recent quarterly report breakout and found support.
  • And more recently Hurricane recovery trades with Home Depot, Restoration Hardware, Lumber Liquidators, Owens Corning, Generac Holdings and General Motors.

None of these stocks, except NFLX, made it on to the IBD Swing Trader alerts.

Looking back over the IBD Swing Trader alerts for the past year, I am less than impressed with the overall average return of .50%.  However their two currently active trades are based on classic setups and are performing quite nicely.

So, do you ever make short term trades, and if so, what are some of the triggers you look for?

Bargain Shopping


For my first 2017 post, I could write about my 2016 watch list returns and how they once again beat all three averages or how my overall investment returns fared much better or how my option trading was a total mixed bag of results; but I won’t.

Instead, I am going to form this post around a question many folks are asking now a days regarding the Trump rally and some interesting “gossip” predictions for the coming year.

First: The Trump Rally:

Though I have been known to try and hop on the momentum bandwagon as the rally train seems to be gaining steam and leaving the station for a run, I generally don’t chase stocks or rallies – especially once they have left the station. 

Instead, I look for good quality stocks setting up in either a good pattern, nearing buy points, or for some reason, have been slow out of the gate and not participated in the rally.

The Trump rally has been in full steam ahead mode since the election and many high flying stocks are now looking tired or pulling back. 

In fact, out of all the current IBD 50 list of stocks, most have notations of “well extended past buy point” or “OK to take profits”. 

Most, but not all.

Some high fliers are forming good secondary buy points or are within buy range of break out points.

Here are the ones worth considering for a watch list – according to IBD.

SCHW – Charles Schwab nearing entry point with a four weeks tight pattern (a bullish consolidation pattern).

OZRK – Bank of the Ozarks is nearing a cup / handle buy point.

MSCC – Microsemi, currently in a three weeks tight pattern.

GS – Goldman Sachs has enjoyed the Trump rally and is in a four week tight pattern.

These next two are very intriguing to me because they are forming one of the strongest positive patterns and are NOT extended past buy points.

STMP – Stamps, is in a cup with handle pattern and near a breakout buy point.

AMN – AMN Healthcare, is also in a cup with handle pattern and near a buy point.

Of course, there are some other non-IBD50 stocks I am watching.  These include:

MLM – Martin Marietta Materis, is in a nice flat base on base pattern.

STZ – Constellation Brands, has been hit hard by the Trump election results because of “Mexico” and fears of tariffs and trade wars; however the stock is near support and in a nice reversal pattern.

CX – Cemex, is a Mexican Cement Company which also has been hit hard by the Trump foreign economic policy.  However, nearly one third of the company’s business comes from US infrastructure demand.  Wall or no Wall, the US is going to be building up infrastructure and needing cement.

And last but not least are some speculative and “rumor” stocks for a 2017 watch list.

Buyout Rumor Candidates:

NFLX:  Yes, believe it or not there is a rumor out there regarding some big entertainment conglomerate type of media company snatching up Netflix.  The front-runner appears to be DISNEY.  Speculation has it that CEO Iger, set to retire in 2018, is looking for one more big deal.  NFLX is also nearing a top level resistance and breakout point.  So the stars may be aligning for some excitement in 2017.

There are other rumored buyout stocks out there but NFLX is by far the biggest one of all.

Of course all these stocks plus my watchlists listed to the right are exactly that.  Stocks to watch and research.  It’s up to you to decide if and when to invest in them.  I look for good set ups and entry points based on IBD suggestions.

How do you look for bargain opportunities in the midst of a rally? 

When Investing Gets Complicated

complicated 01

It used to be simpler. Or at least it seemed that way when I was a kid. When I was a kid, my parents would talk about stocks and bonds and certificates of deposits. Admittedly, I did not pay much attention. I was more interesting in playing with my friends, fishing, camping, playing sports, and music. But occasionally I did overhear them talking about investments and the following is what I understood as a 10 something year old.

Stocks were something that companies sold you to raise money. In return you got a stake in their company. Stocks were risky because they were tied to the success of the company and changed in value a lot. If the company did well, one could make a lot of money; if they did poorly, one could lose a lot of money if not all of it.

Bonds were something governments sold you to fund projects. In return you got a guaranteed rate of return. But the catch, with bonds and CD’s, was you could not get your money back for, like forever, which means 10 or 20 years or argh! 30 years.I know, not exactly correct but hey, I did say I did not pay much attention. Bonds were safer than stocks because they paid you a set amount of interest over a certain amount of time.

CD’s where what banks sold you to keep your money longer and in return, you got a little more interest.  Again, for years at a time.

As I got older I learned a little bit more. Eventually I learned enough to do most of my investing on my own instead of relying on mutual funds run by other people. I have never claimed to be an expert and every now and then I learn something completely new.

Like the other day when my in-laws asked me about callable bonds.

The only time I have ever paid any remote interest in bonds and CD’s is with my 401K. Even then it is in the form of a managed fund which gets a monthly allocation (about 30%) from my salary every month.  It’s one of many things in my life that is a set it and forget it type of plan.

To this day I try to apply the KISS principles to almost everything I do, including investing. Things are complicated enough without me trying to come up with new inventive ways of handling important things like money.

So when my in-laws called to complain that some of their bonds were being called early and wanted to know if it was even legal, I did not have an immediate answer for them. I actually learned two new things from that one question. Bonds can be callable just like options, and, some can even be called early.

How does this even work?

First let me try and explain a callable bond. The ten year old in me would say something like this:

Long-term bonds can have maturities of 10, 20 or even 30 years. Issuers sell callable bonds to avoid being locked into paying above-market interest rates if market rates fall after a bond is issued. For the investor, this makes a callable bond a riskier investment than a non-callable bond. Suppose a company sells a bond with an 8 percent interest rate and a 30-year maturity. Five years later, market interest rates are down to 6 percent. With non-callable bonds, the issuer is stuck with paying 8 percent while the bondholder — that’s you — can fly high by collecting above-market interest. If bonds are callable, though, the issuer can exercise the call option, pay off the high interest bonds and issues new bonds at the lower market rate. That means that you, the investor, lose out just when you should be benefiting from the fruits of your investing genius.

Because investors take a greater risk by purchasing callable bonds, they usually get higher yields to compensate. This means that the bond pays a higher interest rate if it is callable than if it is non-callable. If interest rates on two bonds are the same, the callable bond usually has a lower market price than the non-callable bond, which boosts its effective interest rate.

This much makes sense. What I could not understand at first, nor my in-laws, is how the issuer could call them back early before the call date. In this case I learned that this is a clause in the contract that states it is subject to a pre-refund. The issuer has the option to call the bond before the call date, usually with an additional premium.

But the end result is the same. The issuer will call the bond and want to re-issue at a much lower rate.

So naturally the next question from my in-laws was what should we do? Right now the rates on bonds, and CD’s for that matter, are not nearly as good as they were many years ago. They are looking at a substantial decrease in income at todays rates.  My initial reaction is that perhaps they should consider either a broadly diversified bond fund or a fixed rate bond or CD that is not callable.

One option which presented itself was an investment plan which laddered bonds or CD’s over a series of years. This method would have them investing 20% of their money every year in shorter term (say 5 year) bonds or CD’s. The net affect would re-invest every five years but on a yearly cycle.

Here is how a CD ladder would work:

Investing 5 equal amounts into 1 to 5 years for example 50,000 would be invested:
10,000 one year maturity
10,000 two year
10,000 three year
10,000 four year
10,000 five year

When the one year matures, you buy a new 5 year because the 5 year is reduced to a 4 year.

Such a plan would require a bit more planning and perhaps more fees. The ten year old in me still believes in the KISS principle and would probably recommend the broader diversified bond fund or a fixed rate. But the laddering approach is interesting especially if you think rates will go up.

The important thing for my in-laws, and anybody else who is looking to buy bonds, is to decide what fits their investment style best, consider all the options regarding rates, term lengths, fees, and most definitely read and understand all the fine print of any contract.

As I researched the myriad of information on the internet regarding callable bonds; including but not limited to, pre-refund, renewable bonds, one-time vs continuous call option dates, call steps, reset preferred as well as all the other investment strategies such as layered vs laddered I definitely began to wonder what I and my in-laws had gotten into.

It can be quite daunting to investors when confronted with all the options out there. That is one main reason I try to keep things and simple as possible.

I’d like to thank Rico over at Smart Money who deftly explained all this in a way that even the 10 year old inside my head could understand.