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Analyze Your Past Trades To Help You Spot Future Trends And Make More Money

16 June 2008 No Comment

What is the key to being a better investor? Well, part of it is by learning from your past successes and mistakes. If you make trades, take your profits or cut your losses without any reviewing or analysis of your investing moves, then you are missing out on a huge part of investing. This huge part of investing is what can catapult you into another level of investing success and higher returns. Let’s take a look at what I mean exactly.

As I mentioned on May 22, I sold part of two of my larger and more successful positions: Apple (AAPL) and Chesapeake Energy (CHK). Almost a month later, I decided to take a look at whether or not these were the right moves, to analyze the reasoning behind the moves, and to see how it can help predict future trends in these stocks and stocks like them.

Before I delve into the actual reasons behind selling these stocks, it is important to note that a big reason for the moves was simply to take profit in two stocks that had great runs and had made me a decent amount of money. Taking profit can sometimes lead to missing out on additional gains, but it is a trade off worth taking in my opinion. Remember, gains on paper are meaningless, and it is never a bad thing to cash in a profit.

Chesapeake Energy (CHK)

On May 22nd, I sold a large chunk of my Chesapeake stake. The stock, natural gas, and anything related to oil has been on a tear for all of 2008. When a stock’s trend goes parabolic, meaning the stock price continues to trend upward at increasing rate (the trend line begins to slope almost vertical), I begin to get nervous. Parabolic moves usually end in a pretty ugly fashion; however, it is extremely hard to predict when they end.

As for Chesapeake, the trend continued after I sold my position and the stock is currently over $60 (I sold around $54).  What did I learn from this?  It reinforced the notion that predicting when a parabolic trend will end is nearly impossible.  I don’t think I would play it any differently.  Furthermore, I still have a smaller stake in the company that I am enjoying as it continues its trend upward.  I will continue to monitor the trend and am anxious to learn how it ends, if it ends.

Apple (AAPL)

I had more success with my Apple play.  While the stock bounced higher after I sold part of my position, I was correct in predicting the correction following the 3G iPhone announcement.  I do not want to assume that I can predict the movements of the stock, but it seems that I am getting better at recognizing when Apple may be overbought or oversold (recognizing either is a huge advantage).  Currently, the stock is teetering around $170 and I don’t think it is really in the overbought or oversold camp right now.

I love the stock long term with its multiple product channels, but I also enjoy attempting to take advantage of short term trends in Apple’s movements.  At this point, I am in a holding pattern, waiting for the stock to find a trend either higher or lower.

My success in this play reinforces my attempts at investing in the company over the long term as well as making a quick buck on the short term trends.

Conclusions

Apple moves very differently from Chesapeake.  Chesapeake, and other energy stocks right now, is very tough to predict near term trends as energy and other commodities are in a very overbought (some say bubble-like) pattern.  I’d recommend staying away from the area unless you are investing long term.  We could easily see a huge correction in natural gas and energy or we could continue to see them run higher; nobody can say for certain what path these stocks will take.

The bottom line is that the stock market is crazy.  It can make you feel like an expert financial adviser one day then humble you the next.  Don’t make entries and exits based on emotion, frequently review your past moves, and learn from the analysis.  Find your niche (maybe you only make money playing on Apple’s short term moves) and make a hard run at it.  If you have no idea how to analyze banks, don’t invest in financial companies simply to have a diversified portfolio; rather, ignore the sector completely.

What’s your investment strategy?

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