The Anatomy of a Winning Trade

The Anatomy of a Winning, Short-Term Trade

If you read my book, you know that I don’t believe in the stock market as an effective tool for creating wealth, at least, not quickly (less than 10 years) or exponentially (100%+).

Instead, I use the stock market to create income via dividends, interest, and short-term trading opportunities.

Here is an anatomy of a short-term trade that I recently did.

Ticker: FXA (Australian dollar)
Holding period: 13 days (9 trading days)
Realized return (Annualized): 48%
Lot: 1000 shares.
Enter:  97.91  Exit: 99.59
Profit: $1,649 + $263 (Interest – FXA Yields 3.1%)

Before I enter any trade, I usually need a 4:1 ratio on “why” I’m entering the trade.  (4 reasons why I SHOULD enter the trade versus 1 reason why I SHOULD NOT.)  These “whys” usually come down to technical analysis, and sometimes, current market conditions.

This trade was for the FXA — the ETF that represents the Australian dollar.

Here were my WHY’s (I’ve included the chart)
– Money Flow indicator in oversold territory
– RSI in oversold territory
– Price near bottom bollinger band
– Price near technical support level
– MACD (not shown here)
– US Markets oversold, bounce is “overdue” whether it’s a “dead cat” or reversal, doesn’t matter.
– AUD, in general, looks oversold.
– AUD is a strong currency with a better than average fiscal policy.

Why NOT to enter
– The AUD moves in strong correlation to US Stock Market which has been moving decidedly lower – could continue.
– AUD central bank might lower rates causing possible sell-off (this happened, but the sell-off never happened.)

When to Exit:
DOWNSIDE: If price moves and closes below support on chart.
UPSIDE: Exit when annualized return is substantially > than market (8% is avg market return) and profit > $1,000.

Trading Tip: Watch late market action strength or weakness to help determine if you should sell or hold.
On Wednesday’s big up move, I chose NOT to sell due to market strength into the close … this told me that the US markets would likely continue up the next day.  It did and resulted in the AU moving another 90 cents.  ($900) — before I could sell, I had unrealized gains of > $2,000 but was not able to sell at the highs.  After a strong open, I sold at 99.59 late in the morning on the fear that the US markets would resume it’s move down, in which case, the FXA would follow suit via correlation to the US market.

It did.

The FXA proceeded to close at 99.07.

Trading Tip: Most people don’t know when to sell, or hold. If you are unsure of your exit, ask yourself, is this a reasonable return for the amount of time I’ve held?  I sold because my annualized return of near 50% is simply not a typical market return–it’s a “Fastlane” return..

Trading Tip: If you have an unrealized gain and are experiencing resistance in selling (it might go up more!) have liquid CA$H near your trade station. Fork out the entire amount of your gain, in cash, on your desk.

Look at it.  Here is $1,600.

This is what you just earned — do you still want to “let it ride?”

Here’s an opportunity to learn something from CASINOS — they use chips because they want you to disassociate from the concept of REAL MONEY.   Don’t allow the casino mentality infect your trading — if you need a wake-up call, literally dish-out the money of your gain in front of you — make it real — and once you do, you might find selling quite easy.

While $1,600$1,863 isn’t life changing, what’s life changing is that this whole trade took me about 10 minutes of my time.  $1,600 $1863 for 10 minutes of time, now to me, that’s life changing.

~ MJ

PS:  For posterity sake, I’ll post a “losing” trade too when I get one.  There are no experts in trading; only interpreters. My last “losing” trade didn’t make for very good blog fodder; I bought a PUT on the SPY which expired worthless — not much to write about there!

UPDATE – The day after this trade an addition $263 was credited to my account for the interest on the FXA.  (Yields 3.1% and pays monthly.)