I love this trade. The setup is there. The volume is there. The market is cooperating. But then, “Damn, I lost money!!” How did that happen? Odds are if everything is in your favor for a trade you lost money for one reason…TIER SIZE. Stocks don’t know when you have 500 shares of AAPL or 5000 shares of it. But YOU do. Every penny on 5000 shares is $50. It can be painful to watch tick by tick. It’s funny how your mind plays tricks on you when you have 500 shares of AAPL and can hold it for the $1.50 move but with 5000 you can’t even make a dime. That is the dilemma that I and every other trader on the planet face every day, every trade. When do I want to get 500 shares and when do I want to get 5000? This week, I will try to explain my tier system and when I go for the home run trade vs. hitting the single.
Tier size differs for everyone. My tier size is generally 1000 shares for tier 1 and 10000 shares would be tier 5. Everything else falls in between. Now, I will not go 10000 shares of Google Inc. (GOOG) or First Solar, Inc. (FSLR), it depends on the price of the stock. But you get the general picture. I like to initiate trades with my “feeler” or tier 1 (sometimes even ½ tier) and if the trade sets up perfectly on the chart and looks ready to go my way, I will tier in accordingly.
I never go tier 5 immediately on entry; that just doesn’t provide me with the desired risk-reward scenario. For example, today Molycorp (MCP) and Rare Earth Resources Ltd (REE) were my trades of the day. REE was exploding. MCP was still sitting in the red. That is one of my favorite types of trades to make. Watching a stock explode while the other one in the sector lags. The only question is, why is MCP not going? You always have to ask yourself that question before entry. If you attack with tier 5 and there is a seller, you are in trouble. You may not even be able to get out of it quick enough if it’s a stock that is illiquid. It doesn’t make sense to put yourself in harm’s way like that.
So with that in mind I bought Tier 1 MCP at 30.65. The morning high was 30.92. After I bought my first tier, it went straight to 30.92. At this point, REE was still going, so I added another 2000 shares of MCP at 30.92-30.95. For this type of trade, I had Tier 2-3 on. Next thing I know MCP is now at 31.50 (30 cents under yesterday’s high of 31.88). I sold most of my trade between 30 and 50 cents. I held on to tier 1. And what happened next, it went right through all time highs at 31.88 and stopped around 32.18. I was out of the trade, except for a feeler (100-200 shares) at 32. If I had bought tier 5 back at 30.65, would I have made more money? Maybe. But I would not have seen the trade through clearly because my size and P&L would have dictated my selling points. I wound up making almost 1.50 on the trade in decent because I had size I could handle. I may have made 20-30 cents if I “tiered fully in” right away. That’s just the way my brain works.
As I always do, I equate trading to sports. The model of consistency in my career dictates I am Jimmy Rollins of the trading world. Lots of singles, doubles and triples with the occasional home run. I am ok with that. I know how I think when I get too much size. Size doesn’t always make you more money. In fact, it tends to cost you money a lot more.
P.S.Go Phils!!!
