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The Anatomy of a Winning Trade

by MJ DeMarco · 18 comments

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.)



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Comment Guidelines: We all have opinions and I'm cool with ya disagreeing with me however anonymous comments, stupid comments, trolling, hating, and other uncivil comments will be deleted.

  • xaxa

    i like your book , it is really great , but this is gambling – you can do it for fun but , not for serious income !

    • http://www.themillionairefastlane.com MJ DeMarco

      Yea, it’s gambling if you don’t know what you’re doing.  But I suppose putting your life savings into the stock market and waiting 40 years ISN’T gambling?  

      • Jgospoda

        Awesome!

  • Pingback: The Anatomy of a Winning Stock Trade()

  • Nick

    I appreciate your time in this MJ.  last night I Placed a  buy On the ozzie for a 5% gain on my account for the RBA rate and was knocked out by five pips  for a 5% loss.  I am starting to get the hang of it and am looking for a long term buy and  hold on the ozzie.  maybe when Uncle benny actually implements QE3,  You have Know idea how badly I want this.  Thank you again for the nugget. ^EAGLE^

  • Jd

    MJ,

    Great trade, and really enjoy when you share trading insights (awile back you showed a play on RIMM that was very profitable)!  I do have one question to see if my math is right.   Did you have roughly 97k in on the trade with a stop loss at 45k?  That just seems like a sizeable amount of cash to have at risk to earn $1600. 

    Regardless great trade, and please keep sharing the trading insights as their are appreciated by many!

    • http://www.themillionairefastlane.com MJ DeMarco

       No, no, a currency won’t move 50% in one day.   A big move in a currency is about 1.5% — my out was below support which I felt was around 96.71 – it would also have to confirm that by closing below it by a few cents.

      • Jd

        Ok that makes a lot more sense.   Hope to see more of these posts in the future!

  • http://www.facebook.com/jwhagarty James William Hagarty

    Interesting post MJ. I have no idea what you just said, except “blah blah blah – look I made $1,600 in 10 minutes!”  Isn’t that the RESULT, not actually the PROCESS?  How long have you been studying the currency markets?  How much time do you spend on a daily/weekly basis studying the data before you decide to make a trade? Thanks.

    • http://www.themillionairefastlane.com MJ DeMarco

      I’ve been studying this stuff for years.   Recognition of this trade took me about 5 minutes.  The exit, another 5 minutes.  (The holding period though was + 1 week.)

      • Adrian

        When you are making a profit through trading, isn’t there another person or people who are going to lose the same amount you win? Where’s the value creation in this case?

        When you lend money to someone, I understand where’s the value creation. But when it comes to trading, it seems to me that you are speculating on a future event happening. The mechanics are similar with betting if a football team will win or not.

        Thank you for your post!

  • http://www.themillionairefastlane.com MJ DeMarco

    Update: I also received a $263 interest payment the day after bringing the total profit up to $1863.  The AUD yields 3% and pays monthly which was another reason to enter the trade. (Not listed).  If the currency doesn’t move, I’m paid a decent interest rate.

  • http://www.facebook.com/AldoUrem Aldo Urem

    gambling

  • Stan

    great trade MJ! is that TOS. would love to see more of your trades :)

    • http://www.themillionairefastlane.com MJ DeMarco

       Yes, TOS.

  • jesusvallenilla

    hey MJ can we have your comments on the book The adventures of a currency trader by Rob Booker.if you read it off course.

    I just did, but it was my introduction to currency trading so I am not sure about the validity of his methods? maybe you can help?

    thanks,

    jesus

  • http://www.markaudas.com/ Mark Audas

    I love the Think or Swim platform. It has so many great features.

    I feel the two main keys to successful trading are:

    1) Patience to not take a trade.

    2) Once in the trade – risk management – set a stop and stick to it. This is particularly key when using leverage such as is the case with currencies.

  • JK

    Nice Rip! What was your “buy-in” (money risked)?

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