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