Blog Post

I have found a new piece of the model that needs to be corrected, and it revolves around when I decide to "double down" or add to any original position.

When I ran LDK for 14%, DRYS for 13%, and ANR for 7% in one day all three of those big winners came from the ONE original position.

Quick Recap of the STLD Trade:

The day after I bought STLD the NASDAQ ran up 1.5% and with it STLD ran 4.1% as the stock closed at new all time highs. This is when I added to my position.

Following this record close for STLD, the next three days the NASDAQ shed a staggering 2.8%. To top it off the morning I got knocked out was the day the Fed was announcing a potential quarter point hike. Steel sold off all morning until the unchanged decision was made.I should have known better that pressure would be on commodities that day.

Looking back:

Original buy, $39.17 w/ original stop $38.40 it was my standard 2% stop loss. But my

2nd "double down" purchase, $40.66 w/ stop loss $38.90 made this a 4.3% stop loss. What was I thinking?

The
problem was that I wasn't thinking. I had no rules for doubling down
established yet for the model, and it could have been a great play if
STLD gapped at the open but sadly the market's 2% drop that day had
other plans for the stock.

Model Changes:

The new major rule to the model is with doubling down on positions. Original positions should be the full 100% of what you seek to bet, and if you feel odds are so significant to double down, then the stop loss on the added shares should be no greater then the standard 2%.

Final Thoughts:

Knowing what I know now about the trade, it does not bother me that my original STLD shares were sold for a loss of 2%. How the market and commodity cards played out over the course of the trade was out of my control.

What I can take from this trade is another lesson to apply next time and that comes with adding shares and adding risk. Controlling risk is the key focus of the model, and when you catch a runner, by all means let it run..