Hey, this is Sasha Evdakov and welcome to another episode of let’s talk stocks, episode number 101, chasing stocks that moved and trading missed opportunities.
In this episode what I’d like to focus on is stocks that have already moved already further either to the upside or the downside, and sometimes when they move a little too far too fast, you’re a little uncomfortable at getting in at those price levels.
The question is, what do you do? How do you think about these things and how can you manage the risk? So that’s my goal for today, to look at those things and how I handle those situations and maybe give you some insights on how perhaps you could feel the situation.
I know every person trades a little bit differently, we all have different risk tolerance, so if you have a different risk profile, you might trade a little differently than I do, or think a little differently than I do. But my goal with this session is to give you a different perspective and maybe it helps you find your way or your edge.
Before we get into this lesson what I’d like to do is share with you some quick news and what’s coming. I’ll try to do this periodically from time to time from now on, so you understand what I’m working on if you’re following me and you’re just curious about the things that are in progress.
We’ll make this pretty quick, I have new critical charts, that should be posted tomorrow, Friday the 9th, so my goal is to work on those in the afternoon sessions and get those up by evening time or so eastern time. So I should get those by Friday morning, if not, definitely Saturday morning time.
The other thing is coaching and mentoring price change, so we’ve been doing a lot of coaching and mentoring over the last year, and I put this up as a little introduction to number one, connect with other people and number two, to just really give back and contribute to one on one sessions, because the quickest way to learn is to study with someone else, like a mentor or a coach, so that’s why I wanted to extend these sessions.
When I first started these, I wasn’t sure what the demand would be, I wasn’t sure if people would be interested in this, but that first year, I truly thank you to all of you that have been part of this sessions, because they have been fantastic sessions. I’ve learned a lot, and I know that the people that have got the lessons have learned quite a bit as well.
After doing a bunch of these over time, they are time-consuming so I do need to raise the rates of these sessions, only because the initial rate that I put up was a very discounted introduction rate, again, just as a little way to contribute for those of you that have been following me early on. So now what’s going to happen is we are going to raise the rates.
If you’re still interested in booking it at this discounted rate, you can go ahead to this page over here, and then roll down you can book your sessions. You can even pre-book multiple sessions if you like, and then once you do that, go ahead and schedule a few time slots for yourself.
In either case, I’ll send you some newsletters to remind you about this, that the change is coming, so in case you forget, the people that are on the newsletter list will know this is happening, and when the last day is. So take a look at that if you’re interested in a one on one coaching session, because those sessions are typical that you learn the fastest when you have someone watching you, when you have that interaction one on one, and indeed it’s the quickest way to learn and the most value because there’s someone really looking at your stuff, and we can look at either your charts, we can look at your trading system, your style, maybe you just want some insight on getting started, that’s really what we do in that one on one sessions, because it’s all about you.
The next thing is, I still have in progressed the options course, so that’s kind of the main thing I’m working on, besides a few other tweaks here and there, personal things, and after we get the options course done, I do plan to upgrade one of the courses, if not one or two other courses and throw in some more bonus material, for example the first one that we’ll be doing understands the stock market course.
That’s still a little bit further away, maybe coming into January of the next year, so first we need to get the options course out, and then we’ll be doing the upgrade for the understanding the stock market course, and I’ll give more details to that as we approach and get closer, kind of like getting an upgrade, because that course has been out for a while, it’s still good, but there’s some additional material that I do want to cover, and much of that course will be free for the upgrade for the people that already have the course.
If you already have the course, you’re going to get a free upgrade, so it’s not like you have to be scared to wait for the upgraded version, you can still buy that course, and then I’ll go ahead and do the updated version here sometime in the future here, shortly after we finish up the options course.
That’s kind of what the quick news is and what’s coming, what’s in progress, and now let’s get into the lesson itself.
Fear of missing out
The big thing when it comes to chasing stocks and stocks that move and missed opportunities is the fear of missing out. That’s probably the biggest problem that I see with most traders, and the fear of missing out is a huge problem, especially if you’re new.
One of the reasons is that new traders, they really want to make money from this new skill they just learned, which is stock trading, they want to jump into it and say “hey I’m missing out, I should be making more money”, but in reality, you’re still new, you need to learn to walk before you can run.
They try to rush the process, so they try to jump into stocks that are moving a little bit too quick, or already exploded to the upside, because they assume, I missed it, and now I want to get in.
Also for new traders, they also want to make up the differences from their losses or are greedy to make more.
The differences making up your losses is probably one of the bigger things, because once you’re new, and you’re just getting started, if you had a handful of losses, then what’s going to happen if you’re going to want to get into stocks that are powering higher and exploding to the upside because you are losing money.
You’re going to want to make up those differences, and then, in the end, you again miss out on stocks that are exploding to the upside because they pull back, because stocks naturally and normally pull back.
What I typically do in these situations
What do I personally do in these situations? Or what usually happens? Typically for me, the way that I proceed or approach this concept is, if a stock has extended, it is beyond its normal range, I do not chase it.
The reason is that I am in a dangerous spot when you’re in a dangerous spot that means the risk is against you, and this is because we can have an even more massive pullback.
That’s kind of the main problem with these kinds of moves and stocks that are a little bit overextended because stocks don’t go up forever. They have pullbacks, and they come back into other support and resistance levels and the bigger the spring that they have to the upside, the bigger the massive the pullback that they have.
The bigger the move to the upside, the more significant the pullback
If we take a look here on screen and on paper, when you look at a stock, typically if a stock is moving, let’s just say it’s moving to the upside like this, as the pullback and the wavelength increases, the amount of movement to the downside is going to be kind of relative to the amount of movement to the upside.
But if you have this wavelength, like this and then you have another one that explodes further to the upside, the amount of that pullback that’s going to come back is even more massive. And that is just that spring effect that happens within those stocks.
The bigger the move to the upside that you have, the more significant the pullback, it’s just a reasonable cause and effect relationship. So that’s one thing that you want to be very cautious about when you’re trading these stocks or trading stocks that are moving to the upside that is overextended.
If we take a look here on screen, and we us look at a few examples, you can see that here I have SE Spectra Energy, so here are some things that happen when you’re new, and you’re just getting into stock trading, and you start looking at stocks that move in a big way like this on a weekly, or if you take a look at the monthly, you can see it real power and explode higher.
Typically if you’re new, you’re going to look at something like this, where the stock is moving very lightly, and then what happens is that stock explodes to the upside, so you can see that right here we had that massive explosion, we had that gap up right there and then that stock just continues to explode, of course, we had that value coming in right there, which moved the stock.
The typical pullback is 50%
The problem with this is that if you have such a significant move in this movement, let’s say this stock tops out at 45, I don’t know where it’s going to top out, but let’s say it tops out at 45.
When you have an angle like this, and the stock tops out at 45, the chance of it pulling back or the range of the pullback, because of this move, the typical normal pullback is 50%.
If we have the distance from here to here of that movement, or even from here to here of that movement, our typical distance is about halfway, so we could expect the pullback to come back to this level and still be normal, right around the $40 level.
Because the break out was right around the 37, and we go to 45 so take those two numbers, add them together and divide by two, and that stock can come right up there, and then what it’ll do is come back here, and then it could bounce there, and everything would be just fine.
People are scared of pullbacks
The problem with many people is they get really scared, when they get in it, somewhere around this price level, and then that stock starts pulling back to a healthy normal level, and they get out right before it bounces, because they’re scared of that pullback, so that’s kind of the problem and the issue that happens with these stocks.
When you look at it on other stocks, let’s say here’s another one, TLYS, so the same thing here, mainly the stock movement, the volatility of that stock was a lot lighter, it didn’t move a lot per day.
And then what you see happening is right here, the stock starts to pick up some speed, you can see the volume that begins to follow through, then we gap up, and the stock continues moving.
If you look at this line that I drew right over here at 8.72, and we take a look at the weekly, you can see that resistance level right there, and we actually can bring it all the way across into 2014, so there’s a few resistance points that I’m watching, one of them is right here, another one is here, another one is here. So those are some resistance points, and even there are some support and resistance around 2015.
Those are some key levels, but as I get into more of the daily activities and I’m watching this stock, you can see that if I were trading this on a day to day basis, more than likely I would already think in my view that at this price level, that stock is already extended.
And then the stock breaks through, and now I’m thinking, how much higher can this go? It’s extended, I’m waiting for a pullback, and then again, it keeps going, keeps moving higher, so there are different things that happen, this stock continues moving without a pullback.
You might have other stocks, where other stocks like NAVB, a biopharmaceutical company, where the stock had an explosive effect, so we break out, stock moves extremely high, relatively, again this is a cheap stock, it’s a dollar stock, but then you get a pullback, so you get that pullback right there.
And there’s a lot of stocks that do this, if you look at KPTI, so here, if we look at the daily, you can see again, this is a little more expensive stock, so here we are at the break out at about the $7 mark, so there’s our break out.
We get to about $11; the stock pulls back, and if you look at what we discussed earlier, the price range, between this point and this point, where did we get to? We got to roughly about 50% and now what’s happening? It’s trying to hold those prices.
That’s why, when stocks are moving to the upside, you need to be careful, because sometimes they have pullbacks and other times you might not get those pullbacks, like the TLYS, so they continue moving higher.
What can you do?
What is it that you do in this kind of situations? What is it that you could do as a trader, to plan for these things?
For me, as I look for this, option one is you could wait for a pullback, they will come most of the time, most of the time, when you’re trading stocks, and they’re explosive like these stocks that I showed you, it could be a Facebook, it could be an Amazon, it doesn’t matter which stock.
Of course, the range is always going to be relative to the stock price. The pullback is going to be comparable to those stock prices, but basically, most of the time there will be a pullback that happens. So you could wait for that pullback, and then get in at the pullback range.
Slowly averaging into your positions
The other option that you have is to average in your positions slowly. So you could buy a few shares at one price. If we go on screen here, what I could do is, if I’m looking at TLYS, and the stock moves from the range of about 6.70 to about 9.50, what I could do is go into it, and buy a few shares, let’s just say right around this $8 level, it could start like that. So I’m buying a few shares right there, even though it’s a little extended.
But if you normally buy 1000 shares, you don’t want to trade 900 shares, or 500 shares. You typically want to trade like 100 or 200 shares, because what happens if it pulls back to somewhere around this level, or gets back in to fill the gap?
You want to trade lighter, you want to trade fewer shares, so you could get in a few shares here, and then if the stock continues to power higher, you could get in, again, a little bit higher, and then as it moves a few points, back, even higher, you could take some shares off.
Average in as stocks go up rather than down
Profit taking is a little bit different than getting in, but if we’re talking about getting it properly, this is where you would average in. I’d rather, average in as stocks go up, rather than when stocks go down, and that is because a stock that goes down, could go down much further or lower.
I’d rather have the risk of not making as much, and then keep averaging and adding good quality money into a position that’s losing. From my point and my perspective, I’d rather get into a stock like this.
Or if you look at, let’s just say SE, already for my book, let’s just say I would personally sit out and wait on this stock, because if I look at the weekly, if I look at the monthly, for me, if I wanted to wait on this stock, and that was my risk profile, in this case meaning your risk profile, if you want it to remain on the stock, then what you do is sit and wait.
But if you are the person that wants to get in the stock, because you see potential, then what you do is, again, you now get a few shares up here. And if it goes higher, you can get more shares up at this level, and then still more shares at a higher level. And that helps average your position a little bit further and further to the upside.
Avoid getting emotional
Because the problem is, if you really get in a lot of shares at this one price level, at a certain level, and now the stock has a pullback, it becomes very dangerous because you get emotional about the trades, you get really emotional and psychologically messed up as that stock starts pulling back, you get fearful, you start wondering, you start emailing, what do I do? You start watching the markets more and more, you’re not comfortable in trading, you don’t have the well-being, and you get in that roller coaster ride.
You want to avoid that, you want to trade at a comfortable account level and size, and that’s why your average up.
If you’re averaging down, and let’s use Netflix as an example because I know it had some scary moves. As you average down into positions, as we look at Netflix for example, and you start looking, I’m averaging down here, and then again I average down here, and this stock continues to move down, how much more losses can you endure?
This is a difficult thing for humans to psychologically stay sane and stick to their plan because you keep losing, day after day, week after week, this range of downward movement is about 2 or 3 months, and you start watching things day to day basis, it becomes terrifying and panicky.
In general, option number two would be to average into those positions, and that would be my recommendation if you want to get into a stock that you already want to get into, but it’s already a little extended, so you slowly average into it.
Don’t trade too many shares at once
Again, you don’t want to average into it 1000 shares right away, so if you usually trade let’s say 1000 shares, then the way that you could average, and this depends on your plan, you could in one day you could trade, let’s say 200 shares.
Then the second day you trade another, add to that position, then maybe day number 3 you add another 400 shares, so as you start seeing things happening, you slowly build into it.
Where would I put in the 400 shares? When the stock goes down and has a pullback, but it’s still above the 200 shares that I put on initially, so if I see a stock pulling back and bouncing, that’s where I put a more significant position on.
It all depends on your trading style
If I see this stock still going higher, I wouldn’t have gone for 400, I would do 200 instead, and you slowly start building it up, and this depends on your trading style and the way that you like to trade.
For some people they would do maybe 400 shares at a time, then you go a second grown and then you’re at 800 a then you do the remaining 200. This just depends on you and the type of trading that you want to do.
Selling put option contracts
The final way would be too if you want to get into a stock or a trade, this is a little bit more advanced, is to sell a put option at a price you want to pay.
This is a little bit more difficult if you’re new to options and if you don’t know about options trading, because it’s quite advanced from a general perspective, it’s fairly easy to form a relative option perspective, but it’s a little bit more advanced for the average user.
The way that these works are, you need to be trading stocks that have options contracts, and if you want the basics behind this, I’ll give you the basics but you’ll have to do more research for the technical way of doing it.
Let’s say I want Netflix at 80, and I feel it’s a little overextended, or let’s say 85. What I could do is sell an option premium contract, one contract, and remember, one contract is 100 shares, so what I could do is sell one option contract at the $85 strike price, which they would give me an absolute premium, depending on how many days out I am from the expiration. If it’s 30 days, I get a certain amount, if it’s 60 days; I get a little bit more. If I’m willing to wait for that stock to come back to the $85 price level, then I collect the premium.
Advantages of selling option contracts
What are the benefits of doing this? Well, number one, you get a premium if that stock comes back to 85 and if the stock stays above 85, you get to keep that premium.
If it goes below $85, let’s just say it gets to 83, you still get to keep the premium, but they assign you the stock, so now you get 100 shares of Netflix, and again, the minimum you must buy is 100 shares, because that’s one option contract controls 100 shares.
The problem is, if the stock goes down to 60, you would own that stock at 85, so you take a loss on the hits on the shares, but you still make a profit from the premium you sold.
If you would’ve just bought the stock at 85, then what would happen is, if the stock went down to 60, at least you would’ve lost that full amount, from 85 to the 60, but if you sold some premium with that stock, then at least if the stock goes back down to that 60, you at least get to collect the premium, so your loss wouldn’t be as significant.
Of course, this has to be done on stocks that sell put option contracts, or stocks that sell options contracts. You can’t just do it on any stock; this is already a trade you need to plan out ahead of time.
Those are some things that you need to consider as you’re trading and looking at stocks that are extended. So for example, as I look at, let’s say Facebook, I know Facebook for a fact has option contracts. Here, you can see the stock is at 130, and the break out was right around 127.
If I do an example here on Facebook, and we go here on the paper screen, basically right now, the current price is $130, the pullback that I like, I like the price at 125, so those are the price levels that I want. And we’ll say the stock went here, here is my 130 price level, and then I like the price at 125.
What I could do it again, looking at a few variations, I could, number one is waiting for a pullback, so I could try to wait for the pullback at 125. Option number two is I could average into the position, that stock is already a bit extended, so I could just wait and average into that position slowly, so I’m slowing things down, I’m slowing things down personally because I’m not in a position, because I don’t know now if that stock is going to have a pullback and come back to test the 125 level, or even let’s just say a little bit lower and then bounce. But that part could be a bit more risky or dangerous for me.
I don’t know if that’s going to happen, or I don’t know if that stock is going to continue moving higher to the 140 level, nobody knows right away, you don’t know what’s going to happen right away in that next week or two.
What’s the total share amount you want?
What I could do is average in, so as we talked about earlier, you could do it in 50 shares, or even 10 shares, if you’re trading a smaller account, if you’re trading a more extensive report, you could do a little bit larger, like 500 shares, and 500 shares and 300 shares.
It just depends what the total share amount you want is, so the question is, what’s the total shares you want at the end of the day?
How many times should you average in?
That’s the key thing to figure out first, and then think about average, how many times do you want to average? I’d say three times is usually pretty good, and four is also pretty good if you’re trading a more extensive account, that’s how the big boy’s trade, they average into positions. Because if they get in with 200 thousand shares, that’s going to move that stock quite explosively right away.
Number three, the option that you have is to sell a put option. So when you sell a put option, let’s say at the 125, or you could do even the 120.
If I sold the put option at the 120 strike price, I get a premium, so when I sell one contract, that controls 100 shares, so one contract equals 100 shares.
With that in mind, if the stock now pulls back to 120, my strike is 120, if that stock pulls back to 120, at 119 I would own the stock, own it at 120 if the price is at 119 or anything below it. So you would hold that stock any time it gets below that 120 strike price because that’s the premium contract that you sold it at.
When you do this, you might get a premium, so they’re going to give it to you, so you get a premium, you get money, so let’s just say they give you, I don’t know what the premium rates is for Facebook at that strike price, but let’s just say it’s $2.20 and that’s per 100 shares. So you get $220 for the 100 shares.
If that stock pulls back to 110, you’re going to lose between 120 and 110 the share value because they’re going to assign that stock for you at 120, and you still get the 220, so you’re not going to lose as much.
If you were to purchase the stock on its own at the 120 level, and the stock goes to 110, then you would lose the full $10 price distance. So basically, by selling that option premium, you collect an extra 220 if that stock continues lower.
If the stock just continues to head higher, and it just continues to move to the upside, and it doesn’t pullback and you sold this contract at the 120 and it stays above 120, even if it’s, let’s say 120.01, if it remains above 120, you still get that $220 at the date of expiration.
That’s how that works when it comes to option contracts and the opportunities that you have when it comes to trading stocks that have already moved to the upside and have been moving and you feel that you have a missed opportunity.
Those are the options that you have available, and it’s basically, you’re looking at waiting for a pullback, averaging into your positions slowly or selling a put option at the price you want to pay.
That’s the best way to manage the risk, and of course as you get in and out of positions, selling some shares, buying some shares back as they pull back and as they power higher, that, of course, is a personal style and strategy method, but in general, this is some of the things you need to take into account to manage that risk in the market if a stock is overextended.
I hope you found this helpful, there is a lot of things that we covered and if there’s anything that’s a little bit over your head, and you want to get a one on one session with me, then by all means go to the traders fly website into the coaching per minute session and book a session because these things won’t stick around much longer, at least at this price rate.
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