one thing that i try to avoid with this site is preaching hindsight analysis (you should have done this or that…after the fact). unfortunately, i had to leave early today to run an errand before the market opening and i wasn’t aware of the profit warning issued by AMD which caused the stock to trade down in the pre-market session today.
in the previous post for the AMD setup/long entry, i suggested a stop under the 3.00-3.05 area. however, due to the unforeseen profit warning, the stock gapped down around 10% to the 2.86 level, thereby by-passing any stop-loss orders at the 3.00 area and triggering them at the open. personally, i prefer mental stops vs. hard stops unless i’ll be away from the computer for an extended period and so when i returned home today shortly before the open, i noticed the stock trading down in pre-market.
therefore, this post is more of an educational “hindsight” post and i apologize to those long who were stopped out for not being able to get this out before the open today. in a stock like AMD, where the charts are still showing strong bullish divergences, makes a large gap down that exceeds my stops, i have two choices: either sell at the open and book those paper losses OR place a very tight stop-loss order below the stock immediately after the open just in case the opening gap was due to an order imbalance (as is often the case as a large range of stop-loss orders are all triggered at once as stop-loss orders essentially convert to market orders once the stop-price is triggered).
therefore, by holding off on (or removing) my stop until the stock opens for trading and then entering a hard stop shortly after the open, i still might get stopped out if the stock continues to fall but i also have a chance that the large gap down was a final flush-out move, clearing the last of the stops, shaking out the last of the weak-handed longs, and possibly put in a bullish reversal candlestick on the stock. even if the odds are less than 50/50, the downside to this strategy is very limited and the upside potential is unlimited.
here’s the updated daily chart of AMD and a 1 min chart showing that gap down. from this point, i have placed a hard stop just 2 cents below the LOD (which is the opening price of 2.86). i also stated this as a high-risk, catch-a-falling-knife trade and as such, any position sizes should have been adjusted down accordingly and therefore, AMD might even be worth a shot at adding a second lot at current levels (2.90 as i type) with a stop on the entire lot below today’s low of 2.86.
again, high return potential = high risk and that’s about the only constant in trading & investing. for tracking purposes, i will consider AMD stopped out and move it to the Completed Trades category. if anyone still owns it or enters a position today, feel free to contact me if you would like updates as/if the trade plays out from here.
