The concept of ‘Feeding the Ducks’ has come up in conversation more often recently. This is one of those things that I guess I just take for granted and only remember it’s importance after I see people’s reaction upon first learning the idea behind it. There are a lot of examples like this that I can think of, but when you do something every day of your life for years and years, certain behavior just becomes habit, and you begin to take that for granted.
Today I wanted to share with you guys why I think it’s so important to ‘Feed the Ducks’, and what it means to me. If you ask one trader or money manager what this means, you could get a completely different answer. A popular version I’ve heard in the past is that when a stock you own goes up 7-8 days in a row, or an unusual amount within a short period, you sell some. In other words, like feeding ducks in a pond and you throw pieces of bread out to the starving raft, you throw a bunch of offers out on your stock to provide supply to the chasers that missed the run you just benefited from. “Pouring a little out for the homies” or “Sacrificing some for the trading Gods” are other versions I’ve heard referring to the same concept. I’m sure there are plenty of others but those are a few that come to mind.
To me, it’s a bit different. I prefer to feed the ducks shortly after an entry, but specifically when I nail the entry. It doesn’t always happen like this, as we all know, but when you nail an entry point, long or short, it means that it immediately begins to work in your favor. On another note, a young trader I know once taught me that the best trades are the ones that start to work right away. But that’s another blog post for another day. Today I want to focus on feeding the ducks whenever you nail the entry point.
We’ll use this week as an example. After a fun weekend down in Miami for the Finance Festival, I got back to the charts Sunday night and Monday morning to see that the Nasdaq100 was failing beautifully to hold on to the new highs put in last week. People who know me and/or have been following me for a long time know how much I love these set ups. Simply put: from failed moves come fast moves in the opposite direction. The best part is that the risk was very well defined. The idea was that we only wanted to be short if $QQQ was below the July highs. Anything above that and we’re back to neutral, but if prices are below that we wanted to be aggressively short (there was a bit more behind this trade structurally as you can see here: The Nasdaq Flirts With All-time Highs). It doesn’t always work out this way, as we all know, but in this case, the trade began to work in our favor almost immediately.
This is where I most like to feed the ducks. How I calculate risk is that I take the difference between the entry point and the level where I’ve placed my stop and I calculate how many shares it would take for that difference to equal 1-2% of the portfolio, or how much risk specifically I’m willing to accept. In those instances where we nail the entry, a few days into the trade, as in this case, you take 5-15% of the position off the table, depending on how much risk we were taking to begin with. The point is that you run the math and you take enough profits to make this a risk-free trade. Now that we’ve made some profits, even if we get taken out of our original stop, we can’t lose on this position.
This is how I best interpret the concept of ‘feeding the ducks’. There is no right or wrong way to do this. I’ve heard many different strategies and it really all just depends on your time horizon and risk tolerance. These are all different for everyone and must be defined before ever putting on your first trade or investment anyway. For my interemediate-term time horizon where I look out weeks and months down the road, this way works best for me. The reason is that now I can let the profits run and be patient with booking gains because at this point we can’t lose. From a psychological point of view, this also now allows us to turn our attention to managing new positions and/or other positions already in the portfolio.
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