Looking at the recent Herbalife Ltd. (NYSE:HLF) drama, there is no reason any investor should find themselves in the situation like Bill Ackman placed himself and his investors in. Have you ever let a position go from profitable to a loosing trade, without a clear way of managing it? Well, Herbalife Ltd. (NYSE:HLF) is a prime example of why as an investor, you must know how to read the charts and leave your ego at the door. If Ackman did that, not only would he have saved himself millions, he would have made double that.
Imagine if you were going to place a bet on a good ol’ street fight. Would you put your money on the street fighter who has a studied and well practiced technique, or the fighter who has never taken the time to learn any kind of strategy for fighting, like martial arts? How about the fighter who has won a match or two by pure luck knockout? Or would you place your bet on the experienced proven fighter who has been winning fights consistently because of his training, dedication and time invested into learning his craft and mastering the technical aspect of the battle? As an investor, you must ask yourself the same question. Should I invest my time and money in those who simply get lucky, or something proven? Should I enter a trade without a predefined exit strategy and basis for managing the position? Well, the answer to the questions is obvious. If you are going to follow or listen to anyone regarding investments, you must find the experienced trader with a proven track record. The ones that have taken years and years to learn the markets and have developed a strategy for managing it. This is the same concept as the pro fighter. As I said, sure one can get lucky with a knockout on occasion, but those who last are those who are committed to the craft.
Let’s take this a step further, why not learn the technicals behind the market moves and how the markets function so you can care for your own hard earned money yourself? Doing so will enable you to invest your money with the person that cares most about your investments… you! By learning to read the charts, you can detach yourself from any kind of emotional decision, ego driven analysts with ulterior motives or falsified financial report. Stock charts are one of the most pure form of recognizing the trend of a stock; informing you of exactly when to take profits and more importantly when to admit you’re wrong and take a loss. Stock charts eliminate the noise.
After all, why would you want to spend an endless amount of time reading financial reports which might not be accurate? The same reports that companies use to manipulate and appeal to investors. Let’s take the case of Bill Ackman and Herbalife Ltd. (NYSE:HLF). After a revelation by Ackman of his massive short position in the stock, the equity dropped fast. Most amateur investors sold the equity for fear of owning a company which Ackman was calling a “fraud” and “would collapse.”
A technical savvy trader, however, would have been short Herbalife Ltd. (NYSE:HLF) well ahead of Ackman’s first announcement; ahead of the news and crowds. The reason why those traders who utilized technical analysis were a step ahead of the crowd was based on the weekly chart pattern of Herbalife Ltd. (NYSE:HLF), which was extremely bearish. As the announcement of Ackman’s new short position was made, the equity started to sell off quickly, as those who were not aware of the bearish pattern and were long the stock sold into the news. Technical traders who were already short the stock, not because of Ackman, but because of pure and simple technical analysis, were already eying the levels at which to take profits. Also at that point, “chasers” of the falling stock were just starting to pile on the short side… late to the game.
If you were surprised by the epic reversal of this equity from the low, you were utilizing the wrong strategy. Traders who utilize the charts for making their decisions, were not surprised. The chart of Herbalife Ltd. (NYSE:HLF) fell right into the weekly 200ma, prior pivot support and break out level. Many factors supporting the price of the equity were found on the charts around the $53.00 area. Herbalife Ltd. (NYSE:HLF) continued to fall, right into the $24.55 level, which for technical traders was the perfect spot to take profits. That same level was also a great technical level for those looking to enter a long position or buying the stock. After piercing the support level at $24.55, the equity quickly rebounded forming a bottoming pattern in the weekly chart. Now, one must ask, why did Ackman not take the opportunity of this amazing flush to take gains of close to 50% within weeks? Why try to fight the market? Only he knows the answer to that question. But one thing we know as savvy technical traders, investing on the long or short side of Herbalife Ltd. (NYSE:HLF), the opportunity to make lots of money within a short time span was an easy one. Without being a bull or bear, without getting sucked into the hype, just shorting the bearish set up and buying the equity as it came into technical support on the charts.
Herbalife Ltd. (NYSE:HLF) is a prime example of why as traders or investors you should never fall in love with any position. And even more importantly, leave your ego at the door. Always have an entry and exit plan BEFORE entering any trade. Once your trade is in the money, always take some profits off the table while letting the remaining portion ride with a break even stop in place. If Ackman followed these rules he would be sitting on huge gains right now as opposed to a huge ego battle.
If you let a 40% or 50% profit turn into a losing trade, you should stop trading right now.
Just like the moves in Herbalife Ltd. (NYSE:HLF), everyday technical traders can find similar trades. It is our job to find the best support/resistance levels to profit. It is not our job to tell the stock market what to do, or try to force our will on a particular equity. As proven by Herbalife Ltd. (NYSE:HLF), no matter how big you are or may think you are, the market is always right. The market can and will stay irrational longer than anyone can stay solvent.
Learn to read the charts and position yourself on the right side of the trade ahead of any kind of news or hype. Stock charts are a traders crystal ball into the future. When read properly they can tell us tomorrows news well ahead of time.