The Importance of Post-Trade Analysis in Defining Your Timeframe

Every weekend, I scan through different stock screens to isolate stocks that look ready to break out and potentially be on the cusp of major moves higher. I jot down names I like, put their charts up in the chart grid page in ThinkOrSwim so I can track them in the upcoming week, and post the most compelling setups on Twitter. While pattern recognition and screening criteria are important aspects of a successful trading strategy, one area that doesn't get as much attention requires you to take a step back and ask yourself a broader question - What is my time frame for my trades? If a stock makes a decent move a few days or weeks after I buy it, should I cash out? Or should I hold on for a potentially larger move? With so much focus on areas such as risk management, chart patterns, and the proper balance between technical and fundamental analysis, defining one's time frame is perhaps the most important ingredient to putting together a winning strategy in the market.


One of my favorite books on investing - How to Make Money in Stocks by William O'neil - has a great collection of historical charts of stocks that went on astounding runs. The first 100 pages feature marked-up weekly charts from past market leaders like Northern Pacific in 1900 all the way up to Apple, Google, and First Solar at the turn of the 21st century. Just as there has been great diversity in the sectors from which winning stocks have emerged - from railroads, radio producers, automobile manufacturers, all the way up to internet companies - there are just as many strategies on how to profit from these leading stocks. Deciding on the proper buying and selling techniques to implement in order to take advantage of these stocks' moves is a critical component to an overall successful market strategy, and it's often best learned from past experience.  

When the market slips into a correction as it did this past week, it's often a good opportunity to go over past trades and analyze what you did properly, and what you could have done better. As I looked over my recent trades, I've noticed that I tend to hold on to my purchases a little too long, to the point where I overstay my welcome. Most of my past successful trades have worked out because I sold once a stock has become extended in the short term, as this is often when a stock will form another consolidation and potentially give back a portion of its gains. To illustrate this point, let's take a look at a stock I traded during the most recent uptrend to see how I could have handled it better:

  On 7/2, I bought AMZN as it broke out of a base and hit new highs. Let's fast forward just a few days later to 7/12, where we find the stock up 23 points from the breakout point:

At this point, the stock is clearly extended and due for some sort of consolidation. There's no set formula or percentage I use to gauge whether a stock is "extended" or not; rather, I like to look at the stock's price on a chart in relation to its 10-day moving average, which is often a short-term level of support for high-momentum stocks. In retrospect, this would have been a good spot to lock in profits, or at least move up my stop considerably to protect gains. Despite knowing that a consolidation was likely, I got greedy and hoped my 23 point gain would turn into 30, 40, or 50 points. What was once a nice gain got booked as a small profit last week, as the stock subsequently pulled back from its highs and I moved almost entirely to cash over the past week. My trade analysis - not just on AMZN, but on all trades - has uncovered a few major points that I've since written in a "Rules/Lessons" list so as to always remind myself: 

1) Taking 10-15% gains in individual trades can have a big effect on a portfolio when those proceeds are reinvested in another fundamentally-sound stock that's breaking out from a proper base. While one stock you own may be currently extended, there's likely another stock setting up that could be ripe for big gains. For example, Z was just breaking out to new all-time highs on 7/12, as shown in the chart below:

 Rotating gains out of AMZN and into a fresh breakout like Z can result in serious compounding of returns, and playing just a few of these stocks during market uptrends - with sufficient size - can lead to outperformance. 

2) Who knows how long or deep a consolidation will last? And when other stocks are breaking out, why sit through them? You can always buy the stock back after it rests and bases - there's no reason to hold during the consolidation. My rationalization for staying in AMZN despite it being extended was that I wasn't in it for a measly 10%; I wanted to hit a home run. The flaw in this thinking was the fact that no stock can just keep chugging along in a steep ascent without pausing to "catch its breath" and form periods of consolidation along the way. Let's take a look at a multi-year chart of REGN to demonstrate this point:

 REGN was a stock I owned last summer, with my buys and sale denoted on the chart. My handling of the stock was consistent with the approach I've learned from my post-analysis, in terms of taking profits when a stock becomes extended and not holding through consolidations. However, this chart speaks to another point: Once a stock gets ahead of itself and forms another base, it'll set up again if it's ready for more upside, at which point this second breakout could be purchased. In other words, it's not sound money management to hold a stock during a four-month base while it fluctuates back and forth in a contained range; rather, hit the breakouts and only own the stock during the ascent after the breakout. 

Below is a full list of rules and lessons I've taken from my post-trade analysis. This is certainly not to say these are my suggestions to everyone; rather, it's what I've found has worked best for me:

• Try to concentrate on only a few (3-4) stocks 
• Hit breakouts/pocket pivots (constructive action in bases) with size (risk 1% of capital)
• Only buy stocks when the market indices are in confirmed uptrends with bullish moving average alignment (10-day MA above 20-day MA above 50-day MA)
• Take cues from the general market price action - when to be defensive and when to be exposed
• Take profits into strength as a stock gets extended from its 10-day moving average
• Don't try to hit home runs - oftentimes, it'll result in a round-trip
• Focus on multiples of risk; consider taking profits around 3x or 4x
• Can always buy the stock back if it sets back up; once it's extended, it's likely due for a consolidation  
• Try to buy as close to the pivot as possible, so buys won't be extended
• Use high-level stops to protect profits; prevents round-trips
• Pay close attention to distribution days and lighten up on the 5th or 6th DD; be out on 7th
• Can turn to a SPY short as distribution days cluster on market indices