SHOP – Shopify Trade Review 2017:
As regular readers know, each weekend I publish new trade ideas I’m watching for the week ahead.
…And you know what?
These weekly stock picks (… get access here!…) are by far the most popular content.
So it seems to me… what you guys really want to see… is real-time trading ideas and market commentary.
Well, no problem!
You’ve come to the right place.
Just keep reading. Because today…
I want to deconstruct one of my recently closed trades. So I’ll show you why I bought Shopify back in 2016… as well as… how I managed the trade and why I recently closed the position.
But why am I doing this? Because my hope is…
By sharing my trading plan, you can see EXACTLY what a trend following strategy for the stock market looks like in action.
And let me just say… assuming there’s a good reaction to this style of update… I will start doing more of them, okay?
Okay, great. Plus…
I must disclose to you: these results are not typical! This was a particularly great trade. But it’s timely so I wanted to start with it.
In future trade reviews, I’ll show you losing trades and frustrating whipsaws. I have a lot of them. This way you’ll have a better idea of the true realities of trading (for better and worse!)
But enough with the background. Let’s get down to the business of reviewing this Shopify trade, shall we?
What is Shopify?
Shopify is a fast-growing Canadian ecommerce company. They help small and medium-sized businesses create online stores and fulfill customer orders.
And even better…
Shopify has quickly emerged as a leader in this space. A Shopify subscription lets users create an online store right on their own website! This way, the merchant can control the entire experience from start to finish.
I’m always impressed when I see a company like this in a relatively new and growing industry, with a sold track record of execution (even if it’s a little limited)
… Yet that alone isn’t reason enough for me to buy! So…
Why Did I Buy Shopify?
With thousands of publicly-traded stocks to choose from, how did I land on Shopify?
Well, as I mentioned at the outset, the growth narrative and strong operating results really helped bring this company to my attention.
As a relatively recent IPO, Shopify doesn’t have quite as much operating history as I like to see.
Usually I’m eager for a 5-10 year track record of strong results. And it’s for this reason that I sized down my position a little bit, only risking about 0.3% of my capital on the trade.
So… I think the lesson here is…. you’ll rarely find a perfect investment opportunity. Most of the time there’s going to be at least one or two aspects of a company or stock that you might then your nose up at.
I like to have a rules-based trading system, which helps me prioritize my buying and selling decisions. Otherwise I’ve found you can be paralyzed by endless analysis, and you end up missing out.
“So what made me pull the trigger on SHOP.TO?”
Well, at the end of the day, not only was Shopify posting strong operating results, but shares were really starting to trend up! And that’s what triggered a buy signal for me.
Here is what the chart looked like when I first pulled the trigger:
Notice the horizontal axis on this chart. Without the benefit of hindsight, you can see I was buying SHOP at the highs.
Now I know this can be uncomfortable and intimidating. But as you’ll see, it can also be quite profitable.
And by the way, at that time I wasn’t doing the weekly trade ideas yet. So it wasn’t until October that I blogged about it (here). But if you search the site you’ll see I’ve written about it numerous times since.
How Did I Manage the Shopify Trade?
Well, as a trend follower, my basic strategy is to buy breakouts, and then immediately place a stop loss.
That way, if the stock goes lower I get stopped out. But if the stock goes up, I trail my stop order higher over time as the stock rises.
In theory, this is pretty easy…
“You just need to stick to your plan!”
With so many years of practice, following my system has (finally!) become second nature for me. But it can be tricky if you aren’t used to taking losses ,or if your position size is too big.
Anyways, as you can see below, Shopify made this trade an easy one…
For the most part, shares of SHOP trended higher… and I dutifully raised my stop-loss along the way.
To be honest, this is the trend following dream. In reality, probably only about 5-10% of my trades work out like this. But it always feels good when it does!
However… in the end… even the best of trends can start to bend. And that tends to be when I take my profits and run!
Why and When Did I Sell Shopify?
One of the critical criteria for a successful trading strategy is having a plan for when to sell.
It usually pays to decide… ahead of time... when you will exit your position.
I find this makes it easier to stick to the system. Because instead of trying to make a discretionary decision in the heat of the moment, your pre-placed stop losses do it for you.
And for this trade… you can see that once shares of SHOP.TO exploded above the $120 mark, well, things started to get a little choppy.
These wild oscillations in price started to represent a change in character from the price action that had defined the prior uptrend.
And that’s when my stop was triggered!
Of course… just because I exited the trade… it doesn’t mean I won’t ever buy SHOP again. And it doesn’t mean shares will go down.
It’s completely possible SHOP will be charging back to new highs in no time.
On the other hand…
The recent price action is a departure from the previously strong uptrend. And to my eye, there are now better opportunities elsewhere.
But I know you still might be wondering…
What’s Next For My Shopify Trading Plan?
Well, at this point, it’s pretty simple: I’ve booked the trade according to my plan, and I’ve now redeployed the money elsewhere.
But that doesn’t mean I’m giving up on SHOP entirely. I think the company still has strong fundamental characteristics, and lots of growth potential.
That said, I’m not ready to put capital at risk based on that possibility alone. Instead…
I’m curious to watch the technicals from the sidelines, and if price starts to trend higher again, then I’ll be eager to jump back on the SHOP train. Make sense?
Okay… more specifically…
I’ll be watching to see if/when/where SHOP shares can make a new 20-day closing high. At that point I’ll reevaluate reentry.
In the meantime though, you can bet I’ll be looking at my FinViz scans for new breakout stock ideas.
Now, before we wrap this up, let me just summarize some of the key points to keep in mind from this Shopify trade review.
Conclusion and Lessons Learned From this Shopify Trade Review:
First and foremost, you should know NOT all of my trades turn out to be +100% winners!
But also, if you buy enough breakout stocks, you probably will get trades like this every now and then.
So some particular ideas to remember from this winner are:
- You can make great returns in the market without overtrading or sitting in front of the screen all day.
- Follow your signals: it can be tough to buy highs and sell lows. But as you can see it can also work well to keep you focused on winning opportunities.
- This stock isn’t going anywhere! Barring an unexpected acquisition, there will likely be plenty of chances to buy SHOP in the future, at a more favourable risk/reward trajectory.
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