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Some trades really stick in your memory.
Maybe it was one where you won big – or lost big – but something about it just stood out from the rest.
I had a trade like that back in 2001. It was a breakeven trade, so I made no money. And yet, it's etched in my memory.
The market bubble of 2000 had popped, and traders were largely following the big week-to-week swings in volatility.
While 2001 would prove to be another down year where the markets lost 15%, there were two rallies of over 20% during the year – a fact that highlights how big the swings were.
On this day, I had traveled to Chicago and was trading in my friend Brad's day-trading group in a suburb on the edge of the city.
CNBC was blaring on the TVs hanging in the corners.
It was a big up day in the markets during the counter-trend rally that lasted from mid-September until the end of the December.
During that tumultuous time, our strategy was to "test the waters" early in the trading day in several different fast-moving sectors. When a trade in one of the sectors started to work, we'd pile into other similar stocks.
That day, semiconductor stocks were moving.
Oddly enough, I was trading a stock that has been making headline news lately.
Broadcom Ltd. (Nasdaq: AVGO) is making the largest tech takeover bid in history.
Back in 2001, before all of the mergers and acquisitions over the last 16 years, the stock traded under the symbol BRCM.
I had a good profit in BRCM, which was a fabless chip company – meaning it designed and sold semiconductors but contracted the fabrication to another company. I checked my sheets for a similar stock and found PMC Sierra (trading under the symbol PMCS at the time) – another fabless chip company that traded very similarly to BRCM.
I bought a bunch of PMCS stock and waited for the profits to roll in.
But the stock stayed flat.
I watched as BRCM and almost all of the other chip stocks soared.
But PMCS laid there like a rock.
Every time it would move up a penny or two, a large seller would jump in and keep the price flat.
I was livid. I had done everything right.
I had found the big move of the morning and was making good money in BRCM. But I should have been making really big money with two horses in the race.
Except that PMCS wouldn't go up.
I cashed out of PMCS for literally no money.
If I had bought practically any other chip stock, as my "pile on" company, I would have been in the "deep cabbage" on a big money day.
As it was, I had a good day that could have been great.
I had missed a big profit opportunity because of a bias that we all suffer from in many walks of life – but especially in the markets.
Let's look at this bias that bit me in the wallet and see how we can avoid it in our trading and investing today…
Knowing Where to Place the Blame
When I was debriefing my trading that day, I was very happy with my BRCM trade. I made good analysis to get in early, and I rode it well for good profits.
But the PMCS trade?
That stinkin' big seller kept the price down all morning. They killed my good trade.
My friend Brad asked me why I just didn't jump into some other chip stocks? There were certainly plenty to choose from…
That question hit me like a ton of bricks.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.