Risk off trade mod on ANET - long at 171.92This trade is a little different than what I usually do. It's something I've been playing around with for use during tough times. It's still a mean reversion, but with a little safety net just in case. It could involve a realized loss, so beware if you are used to my trades that don't go that route.
Things feel shaky in this market right now. The fact that they FEEL shaky doesn't mean that they ARE shaky, though. But as with much of trading, I'm no prognosticator where markets are headed - that's way above my pay grade. My normal trading methods are great in choppy non-trending markets, ok but locked out a lot in uptrending regimes and can be downright rough (though almost always ultimately profitable) in downtrends. This is a compromise for in case that last one is where ANET is headed.
As always, the goal here is a quick flip. Essentially there are 3 ways to play those - aggressively trying to squeeze every drop out of the trade; a more neutral version where exits are usually quick but stubborn holds until profit are part of the equation; and then a conservative version - which is the one I'm doing here.
The entry here is based on an abnormally large downward move. The twist is the exit which is based on a 4 part decision tree.
Part one - if the next bar opens above my entry price, I close and walk away with whatever profit I get. These are often small wins. But my game is to beat the average daily return of the market and do it all over again with that same money as soon as the trade clears. So the bar isn't high: more than .043% in one day puts me ahead of the game. If I can get 6x that (about .25%) once every week, I'd beat the market's long term average return. So I have no problem with a small quick win here and that is my preference.
Part 2: If that fails and the stock opens below my entry price tomorrow, then my next target becomes an above median move from that point. Now, if it Is a large gap down at the open, this option may immediately come off the table, as even a move to that level would still be below my entry price and I'm not taking a loss this quickly. But if the median high is above my entry price, I set a limit order at that level and I hope for the best.
Part 3 - If that target does not get hit, I will revisit the trade near the end of the trading day. If closing at that point gives me a profit I take it. And if not...
Part 4 - do it all over again tomorrow the same way. If that bar's open is above my entry, I close. etc. If, however, at the end of the 2nd day I'm still in the red, I eat the loss.
Some general notes about this. First, the most common result is out the next day. For ANET, this technique has had a win rate of 82% over the past year, with an average trade being about .33% with losing trades included in that average. That's around 7.5x the average market return and a level that if annualized, is an around 80% rate of return. Not too shabby. About 75% of the trades have been day 1 wins. Once you get to day 2, it becomes closer to a coin toss.
However, and this is important, losses tend to be asymmetrically large. The key is that they are almost never huge. The average loss was 3.2% over the past year while the average gain was only 1.2%. But an 80% win rate, even with smaller magnitude wins overwhelms the losses. This is not a fluke of recent strength in the stock, either. The dynamics are similar, though a bit weaker, over the long haul.
Over the 12 years since ANET went public, covering 650 backtested and live trades, the win rate on this is around 70%, but the discrepancy between win and loss magnitude is smaller, producing an average daily return on invested capital of .25% - still a 63% annualized rate of return.
The more aggressive ways to trade this would, predictably, lower win rate and raise average gains overall, but jeopardize per day returns (capital efficiency). Given the run that ANET and its cohorts have been on and the weakness this part of the market keeps flirting with, after ANET has clocked a price jump of almost 50% just in the last 3 months, I'm choosing the path fraught with the least amount of short term danger.
If there is a market meltdown, I want my capital available and not tied up for months or years waiting to get back to even. This guarantees not to lock up capital. The biggest loss in the last 12 months on ANET doing this has been 6%. I can make that much on a single trade on one good day. I'll risk the loss for safety and liquidity right now.
By the way, stacking additional lots is possible, provided my entry criteria are met. Additional lots follow the same rules. I'll keep this idea live until all lots have been closed.
As always - this is intended as "edutainment" and my perspective on what I am or would be doing, not a recommendation for you to buy or sell. Act accordingly and invest at your own risk. DYOR and only make investments that make good financial sense for you in your current situation.
