RMBS 18% Drop: How I Avoided Taking Losses
Key levels must be hit, strong action must be seen, and then you take the trade.
If you have not noticed yet you will notice now.
I have repeated it a few times. Usually right after a trade idea.
But I thought it was worth dedicating an entire newsletter to this very important part of trading.
Especially after RMBS gave us a violent reminder after a huge drop post earnings.
Yes, you must have discipline. Yes, you must have the right mindset.
But what does this mean?
It means when you have a plan, you must follow every step. Otherwise, what is the point of the plan? And what are you doing exactly?
Arguably the most important part of any trading plan is the entry.
So, there is one thing in particular I want you to know about taking a trade.
Every trade comes with a set of criteria that must be met before you enter the position.
The key word is must.
If the criteria is not met, there are no exceptions to the rule. You simply do not take the trade.
I posted a trade idea for RMBS, noting the potential upside. Here’s that chart of RMBS the day after earnings.
Clearly there was no upside to be had and there was a whole lot of downside.
The good news is, nobody should have entered this trade. Not a single person.
The criteria to enter was simple, and it was never met. And then shares sold off viciously, highlighting the importance of having the right information and following it.
Here’s a look back at the criteria from the February 5th trade ideas.
Unfortunately (or fortunately, depending on how you look at it), RMBS never even got above $70 so the entry for a big move higher never presented itself.
If you got in early, possibly thinking you might make more money than if you had waited…well you see the results.
It is rare to capture 100% of a move and it is just as uncommon to profit from trying to do so repeatedly.
You’ll catch a few amazing wins, but the losses will undoubtedly mount and will overwhelm your account if you ignore your trading plans.
Especially if it means you are taking on added risk, which is usually what is happening.
I believe in learning from trades you take, as well as those you don’t. RMBS provided a powerful lesson that hopefully you are able to benefit from.
Patience and discipline really are your best friends as a trader. The sooner you embrace this fact, the faster your account will grow.
-Nate
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