Saturday, December 09, 2006

Trade Review: CEF

Inspired by Bill, Trader X, Tapeworm, Ugly, I have decided to discuss trades I have made. These early trades were made as an educational endeavor to understand buying and selling of stocks using minimal amounts of capital. For the most part I bought and sold these shares as I developed my investing and trading process.


CEF was a stock I bought as an idea on a metal play. The main reason for purchase was just to get my feet wet on buying a stock in a sector I thought was in a trend. At the time I did not really know much about trends, but since then I have found that a good place to learn more on trends and what to do with them is Howard Lindzon’s, blog. CEF seemed a good way to take advantage of what I thought was a positive trend. So I bought. And then I sold.


On February 27, 2006, I bought Central Fund of Canada (CEF) at $7.66. As usual I cannot say that there was any particular signal that stood out, so again I would describe it as a random entry as discussed in Trade Your Way to Financial Freedom. With the benefit of hindsight, it is clear that it was clearly overbought, but not violating the trend.

On April 20, 2006, I sold CEF at $9.20. I had a gain of $1.54 a share or just about 16.8% in 53 days. Measured as R, my gain of $1.54 was 2.44 R.

Why did I sell? At that time I cannot say I had any real reason to sell. I simply was amazed that I had gained 16.8% (or 2.44 R) in less than two months and figured it was due more to luck than skill so I better take while the taking was good. Again looking back with what I know now, the Average True Range (thanks Bill) was $.212 and therefore my R was $.63 (understanding why R is important comes from Trader Mike). Based on that, my trailing stop should have been $.63.

Following a chart it is clear that CEF made a high on 4/19 of $9.84 and then closed down at $9.08, a loss of $0.76 cents. So my “gut” decision to sell, even though I had no idea, was actually the right thing to do based on the trailing stop of $0.63 cents. In hindsight, my decision to sell was actually sound based on the trailing stop, although I had no idea of that at the time.

Bottom Line

I did not use a stop and got lucky. Once again I had a random entry which worked out well based on the stop. Stops are showing themselves helpful in protecting profits.


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Excellent stuff