Samwise Quick Reference Handbook
To streamline our daily blogs and conserve space, we’ve organized key resources into a convenient, collapsible dropdown menu below. A sort of Quick Reference Handbook if you will -- as our friends in aviation might call it. By clicking the menu below, you’ll have qu...
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I like the analysis and patience. A disciplined approach is key.
Thanks for the call to patience. I know my big fear is that the doller devaluation is the cause for asset inflation. Especially relative to the euro shows that the QQQ is worth around $495 a share (currency adjusted). I know that is not all the way rationale, but that is the fear that crosses my mind that the doller devaluation is overstating the true qqq price recovery
Hi Sam,
Would love to get your commentary on your approach to evaluating the state of trades and at what point do you decide to “cut the loss” if a trade starts becoming unfavorable. Like, when you put on a trade are you approaching it with an all-or-nothing mentality where the trade ends up profitable or it just doesn’t and we just take the full loss? Or, do you re-evaluate the trade half way and decide to de-risk and take a loss on a portion or the full trade?
Thanks!
This is an extremely complicated process when it comes to putting on certain types of trades.
Let’s consider the typical momentum based trade situation where stop-loss might be appropriate. Suppose you have a stock that trades within a well defined range and on a clear-cut trend.
It’s just moving higher virtually every day on high momentum within a general range of 1-3% and a pull-back range of no more than 4% from any given peak. It has been trading like this for some time and you want to ride the momentum.
In that type of trade — where options aren’t involved — you simply go long and set a stop loss at x-% below your entry price. Probably something just past the trading range, trend-line or peak/trough pull-back range price.
So you ight get long at $100 and set a stop at $95. If the stock keeps moving higher, you move the stop up until it’s eventually violated. By riding the momentum, you might hopefully be able to exit at $130 after the stock pulls back sharply from $140 or something like that.
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But let’s consider a trade like the QQQ $530-$520 put-spread we just put on in the QQQ. when we put on that trade, we did so on teh expectation that the QQQ might rally up until day 100 (August 28) and then sustain a correction over the ensuing 23-days.
We put on a 3% position. Now the problem with “cutting losses” in a trade like that is that the drawdown risk is extremely high. There’s a very high chance that at some point, there will be a drawdown. We’re unlikely to enter the trade exactly at the precise peak. And if we set parameter to clsoe out at x% loss or drawdown on the trade, then it is ALMOST CERTAIN to be losing trading even if the eventual outcome goes in our favor. We are almost certain to take a loss.
Most trades will sustain a big drawdown – especially the we’re talking bout near-term spreads like the Sep $530-$520.
Instead of worrying about ‘cutting losses’ in the way one ight with stop-losses, we just set a very low allocation i.e. 3%. So if it’s a total loss, it’s a 3% hit.
Otherwise, we can’t put on the trade at all. Remember, when we put on the trade, we do it on the expectation that the QQQ might continue to rally until August 28 and that we’re capitalizing on the eventual correction that occurs between August 28 and September 23.
What we want essentially is to exit with the QQQ nearing $530 with a week or so to go until expiration or down near $520-$525 at expiration. Our parameters are for an expectation of a 10% sell-off. Even if the QQq ere to rally to $580 a share, a 10% drop puts it at $522.
A peak at $570 puts the QQQ at $513. We’re not at $570 right now.
When it comes to short-term calls and spreads, allocation is the key. Hedging can be done in some circumstances as well.
Even though NVDA already pulled back and is retesting, do you think it pulls back again if QQQ does? Or will it keep going to 180 even if QQQ pulls back? Or do you think at this point there is no pullback and the market goes straight to correction once the segment is done?
Yes. Anytime the market pulls back, Nvidia goes with it. It doesn’t’ matter if Nvidia pulled back already. Also, the Nvidia pull-back was still relatively minor.
Call for patience is much needed – thanks Sam. Additionally, do you layer in ATRs over time as a part of your analysis too?
Not directly
hmmm… First trading day that I can remember where Sam did not post a daily briefing
Indeed. I hope he is ok.
I’m around. I’m posting later tonight. I just had to be away from the office today. Watched the market all day. Just wasn’t able to post during market hours.
If anything exceedingly important happened, I would have for sure. Will post daily briefing later this evening.