Whenever we as traders look for new opportunities, it’s very easy to get overly excited during our initial analysis. After all, our hard-earned money’s at stake, and if we think we have a certified winner on our hands, it doesn’t hurt to be optimistic, does it?
Hoping your trade does well is one thing, but blind optimism is something else entirely, and can often lead to an emotional attachment with a particular stock – something that sounds silly, but absolutely happens to plenty of traders who get “tunnel vision” as a trade bumbles along, often deeply into the red.
It’s even more common amongst options traders, who sometimes find themselves down 50% (or more) on what seemed like quality setups.
And while everyone will have losing trades – even the ones that “check all the boxes” – the fact is that we still get ourselves into positions we had no business buying into in the first place.
All because we weren’t critical enough of our setups to begin with.
Case in point, Viacom Inc Class B (NASDAQ: VIAB) illustrates precisely what I’m talking about:
Wow, what a great setup! We’ve got a weekly candlestick close above the last 3 bars, the 50-week moving average is relatively flat despite the huge whipsaw rally over the last few days, and there’s 2 higher lows to boot!
But wait a minute, before I go long above the high of the most recent weekly candlestick, let’s take a closer look at some of the not so great parts of the chart…
A triangle’s been formed over the last few months, which is fine, but stochastics are barely in the acceptable range for me to enter a long position (I’d prefer for them to be further below 40). Worst of all, though, there seems to be staunch resistance at $31.00, just 3.79% off the last week’s high.
A breakout past the upper triangle trendline might not survive with resistance (that VIAB bounced off twice) being so close, and the stochastic reading suggests that VIAB isn’t necessarily oversold – a condition that I usually want in a long trade.
Moreover, the triangle formation is still a way off from coming to a “point”, meaning a move above or below the trendlines at the moment might not be a true breakout, but just an alteration of the trendlines as they draw closer together.
Normally, one or two of these “bad” indicators wouldn’t scare me off if the price action was truly spectacular. But because VIAB is trading itself into a corner AND there’s so many negatives going against it, I’m going to pass. There could be a trade here eventually, but we could be months away from anything truly special.
Avoiding poor setups from the get-go is arguably a trader’s most valuable skill, since only a few significant losers can crater a portfolio’s short-term performance. When it comes to investing, compounding interest is your friend, and getting skewered on trades that don’t jive with your methodology can be a huge momentum killer.
So, next time you fall in love with a new setup, take a step back and really examine it to see if there are any obvious flaws. Doing so could end up saving you plenty of dough and possibly your sanity in the progress.
Because there’s nothing worse than being betrayed by the ones you love, like a couple of SPY put options that just took you to the cleaners.