Thursday, December 21, 2006

Trade Review: JNJ

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.


JNJ was a stock I bought as an idea on a relatively undervalued company. The main reason for purchase was just to get my feet wet and I felt JNJ at that time was undervalued enough to present with a sufficient margin of safety that would preserve my capital. So I bought. And then I sold.


On February 17, 2006, I bought Johnson and Johnson (JNJ) at $58.98. As usual I cannot say that there was any particular signal that stood out at that time due to my newness, so again I would describe it as a random entry as discussed in Trade Your Way to Financial Freedom. With the benefit of hindsight, JNJ was overbought, as a check of the chart shows selling as measured by RSI on a monthly basis (as Bill Cara advocates) may have been overdone in late 2005-early 2006.

On April 24, 2006, I sold JNJ at $58.50. I had a loss of $0.48 a share or just about -0.8% in 66 days. Measured as R, my loss of $0.48 was -0.18 R.Why did I sell? At that time I cannot say I had any real reason to sell. I was not nervous or anything. I simply thought I had a better investment I could use the money to buy.

Looking back with what I know now, the Average True Range (thanks Bill) was $0.887 and therefore my R was $2.66 (understanding why R is important comes from Trader Mike). Based on that, my initial stop of 1R should have been $56.32 and a 1R target of $61.64.

Looking the chart on Yahoo it is clear, in hindsight, that JNJ never came close to hitting the stop, with the lowest point in early March at around $57.50. In fact JNJ traded within the ATR for about four months and did not cross over until the close on June 21st at $61.79. Following the Yahoo chart, after the high of $61.79, JNJ came close to hitting the trailing stop a week later on June 28th, closing at $59.23, a mere ten cents away from the trailing stop at $59.13. After that point JNJ made a multi-month move up to the high on October 23rd of $69.41. Using that high close and setting the trailing stop at $66.75, the stop would have dictated a sell on November 8th using the $66.15 close.

Adhering to a stop would have kept me in the stock for a 10.8% gain in a little over 7 months. Expressed as R that is 2.70.

Bottom Line

Once again I had a random entry which, had I used a strict stop, would have resulted in a decent gain.


Sami said...

interesting... refreshingly different from all the other day-trade reviews out there.
i've got couple of questions. My understanding is that R is the percent of capital risked on the trade. If that's true, then how did you figure out your R by looking at the ATR of JNJ? Also what would the trailing stop be? and how did you pick that value?
i am sorry if these questions have already been answered in earlier posts. i am new to your blog and i have not read back posts.

p.s. one more suggestion. when you reference other sites, such as Trader Mike's for R, could you please link to the actual entries (if there are any) where the discussion occurred, instead of linking to the main homepage!

thanks much. i am glad i ran into your site.

NO DooDahs said...

If you go to and check out the tag cloud or the subjects link on the left, click on "position sizing." That'll take you to a list of posts on the subject of R.

I got the idea of using variability of a stock for the stop loss from reading one of Tharpe's books. It's an old idea, not even his originally, and one of the earliest methods used the standard deviation i.e. bollinger band width. I use a multiple of the average true range in most cases.

Check out my last post on the subject.

However you define the stop loss, the distance from entry to stop can be used, along with risk R, to size the position. Hopefully the post is relatively clear …

Merry Christmas!

Sami said...

thanks Bill, merry Christmas to you and yours.

i was thinking of R in terms of % of capital risked and i totally zoned out and forgot about the volatility model. Thanks for the reminder.

I use a slightly different approach, as i am more interested in position management and less in day/swing trades. Following an idea from Livermoore, i like to initially send a probe. I risk a fixed dollar amount for my initial entry. based on my risk, the distance between entry and stop and the stock price, i determine the position size. If the stock moves against me, then i am out my fixed amount. Otherwise, i add to the position as new setups develop. Every time i add to the position i move my stop for the whole position based on my last entry. Since i only add to profitable positions my R calculations take into account the existing profit. Also, since i am not day trading the position size depends on how much free cash i have.

Eventually, i either get stopped out based on my last entry, or i close the position to free up cash for higher probability plays.

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