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1) KERX went down 24.3% in 10 days

2) COMS went down 25.1% in 12 days

3) BCRX went down 37.7% in 21 days

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An introduction

After facing the increased risks involved in day-trading and the frustrations of low-performance investing based on "fundamental hope", even in carefully-selected stocks, I believe in swing/position trading –also called "active investing", as opposed to the buy-and-hold passive investing–, as the trading styles that hold the best risk/reward and effort/reward balances.

A mistake made by many traders is that they try to catch minor market swings, taking the multiple risk of overtrading, generating more commission costs, wasting time that could be dedicated to the analysis of better stocks and better entry points, and exposing themselves to the psychological challenge of multiple consecutive failures.

The most successful speculators focus on major position trades, since they are far more critical to trading/investing success than minor market moves. Significant price moves in one good position can offset the minor losses associated to well-calculated stops being hit, while alleviating the stress associated to overtrading. Of course, major position trades must be carefully planned and taken with an edge based on knowledge, intuition, discipline and risk management.

This risk management and trading tips section was not planned as a mechanical system to enter and exit trades, but as a compilation of "secrets", collected from master traders, successful investors, good trading/investing books and my own personal experience, and optimized to avoid the technical excess and fundamental hatred often seen in short-term traders and the fundamental excess and technical overlooking that are the mark of buy-and-hold investors.

And finally, the tips:

Before you trade

1. Plan your trade and trade your plan. Before jumping into a trade you must have decided the following: Amount of capital commitment, position size, entry range, entry strategy, stop points and potential profitable exit points.

2. A general rule for capital commitment is: Put not more than 5% of your portfolio value in a single stock. However, you can overweigh winning positions, particularly when they breakdown favorably and during trend resumptions.  After averaging up on a winning position, 10% of your whole portfolio value is an acceptable proportion.  

3. Record your ideas and monitor the market on a regular basis. Sooner or later, appropriate conditions will appear.

4. Prepare yourself to control your emotions.  Don't trade to make money, trade to trade well.  Profits are just a by-product of good habits.

Entry tips

5. Look for a technical pattern that says the timing is right.

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6. Instead of aiming for a particular entry price, use an appropriate entry range. A planned entry range will allow you to stay calmed, build your position in small lots, develop a low-risk staggered entry, and add more when the price is optimal.

7. Do not confound staggered entry with averaging down, the act of committing more capital into a losing trade. Averaging down is the mark of the least prepared traders.

8. If you believe that a major trend is developing , once your stock is in your entry range, don’t be greedy or hesitant trying to get a slightly better entry price. Be decisive. If you want to be involved in something, don’t bid, take it.

9. To keep a low risk, split your entry in small lots. As a rule of thumb, 3 lots are appropriate. For a short trade, the 3 entries are 1) When the stock begins moving within your entry range and market conditions look favorable, 2) When you find a better price within the range, i.e. it moves slightly "against" your first lot, but keeps its entry range, remains at normal volatility levels and stops the uptrend right at a known resistance points, and 3) Immediately after your know/feel that your stock initiates a major move, or it violates a key support area.

10. Staggered entries are a safe approach. If the stock moves against you, you will feel safer, stay calmed, and also will be psychologically stronger to keep your discipline and let your predetermined stop orders work properly. If the stock moves in the desired direction, you can always increase your position, thus averaging UP.

11. Never, ever, average down. For short trading, selling more at higher prices means averaging down (not averaging up), since you are increasing a losing position.

12. Do average UP. Averaging UP, adding to a winning position, is the mark of successful position traders. Of course, in short selling, averaging UP means shorting more at a lower price. Trend resumptions are the best points to average UP.

13. Did I mention "average UP"?

14. Missing the first portion of a major downtrend doesn’t mean you can’t jump into it. Just plan your trade again, stops included, use your intuition to visualize potential re-entry points at key trend resumption patterns, wait for them, and stay consistent with your original idea.

15. If after a successful entry with nice paper gains, your stock makes a complete retracement, erasing your profit, it invalidates your prior entry range as a potential re-entry point. Even if the trade still looks good, don’t increase such a position.

Exiting winning trades

16. Do not take quick, measly, profits in major position trades. Particularly, when you are dramatically right on a trade, never, ever, take profits on the first day. Don’t look for pennies if your idea points to whole multi-dollar moves. Let your winners run.

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17. Don’t get anxious to exit a winning trade after it gaps in your direction. Take partial profits and use that gap, with a volatility safety margin, to set up a nice trailing stop.

18. If your short stock gaps down on large volume and bad news (yes, you can be that "lucky" if you do your due diligence), always keep in mind that one or two dead-cat bounces are expected, but bad news usually sustains the gap for 3-5 days. If the stock is still fundamentally overpriced, the post-gap consolidation may still be followed by a profitable downtrend resumption.

19. If a short term objective is reached, but you still like the trade, cash out partial profits and ride the rest on trailing stops.

20. Use trailing stops, rather than stringent price targets, to ride the most profitable trades. Price objectives can work against realizing the full potential of that major trend.

Exiting losing trades

21. Set your stops before your entry, and adhere to them.

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22. Exit your trade if a new, unexpected, pattern or market action is contrary to you trade idea, even before it hits your stop.

23. Get out immediately once the original premise for a trade is violated. I.e. you were expecting bad news, the company does release bad news but the price gaps up, indicating extreme bullishness… Yes, that kind of irrationality is often seen and you must be prepared to accept it.

24. Even in the "extreme irrationality case", I discourage reversing a position based solely on technicals or herd behavior. If your original plan is sound, sooner or later the trend you expect will develop itself, and you must keep the positive mind that tells you that you were right. The trick? Be patient, wait for appropriate reversal signals.

25. The monster gap-up after a short sale. If a position gaps against you after the breakdown, just let your trailing stops work. But if you just jumped into that trade and are facing a loss, stay calmed, don’t panic, but also don’t freeze, act! Here I tell you what masters traders do, applied to short positions:

• Monitor trading activity for a full 5 minutes, don’t buy/sell/cover/short/short more. Do nothing but watch.

• After 5 minutes, mark off the day’s high. Write it down, it will be your guide to what to do next.

• Cover half of your position if and when the stock breaks above the 5-minute high.

• After 30 min, mark the day’s high again.

• Cover ALL your position if and when the price breaks above the 30-minute high.

• Unless you have an unlimited cash source, please, do not attempt to average down.

• Do NOT average down.

• Never, ever, average down.