Stock Trading Info

Expecting a miracle?? Well it won’t happen. This article is written to deal with trying to trade out of a losing position, NOT to ignore stop losses. Ignoring stops is the surest way in the world to take all the money in your account and just flush it down the toilet. I am serious. While that might help you in the short run eventually there is a 100% chance you will have a massive loss, like 50% or more on your money lost that is invested in the day trade if you don’t use a stop. In addition, you will accumulate a portfolio of losing positions and have no more money to trade with. Every huge loss starts with the trader refusing to take a small loss – often times as a result of taking a loss and then watching the stock turn in their favor. So the thinking is “They are not gonna get me this time”.

The first thing to realize, there are 4 reasons losses that can happen when you are in a trade.

1. Timing is off on the entry
2. You are dead wrong on the direction
3. News items come out and move stock or index against you
4. Your price target to exit is too far away

We will address these one by one.

1. Timing is off on the entry

If your timing is off on the entry (the most common), usually that means the stock will go a little for you, then move against you within the first 5-10 minutes. The amount it moves for you will be far less than against, but the stock does not really go down to your stop area. The key to identifying this is the stock will hesitate up and down, just below your entry for long or above entry for short. It should not make a beeline against you and it should not go right near your stop in the first few minutes.

The best way to deal with this type of trade is to assume most of the time you trade you are going to be off. Buy or short only 1/2 to 2/3 the size you want where you think the entry should be. To help with this issue, never use market orders. Put a limit in just slightly below market, almost every time you will get filled. Obviously you need to be aware of the trade type – if it’s a breakout and you don’t think you will get filled if you don’t use market, then for sure just go in. Most trades will not just run immediate, including breakouts. Once filled, put an initial stop in for that position. Wait 5 minutes and see what the stock does. If it runs in your favor immediately, well then your timing was perfect – trade what you have OR look for the remainder on a small dip.

Most of the time the best deal is to just trade what you have. If the stock moves against you more than for you in the first 5 minutes, but is not a beeline against you (meaning it looks like the trade will stop out etc), then put in an order to add at the low of this 5 minutes (for long) or the high (for shorts). In addition, if you are aggressive, put in another add order (press bets) above the high for longs, or below the low for shorts. IF you don’t get your better price add, usually this press bets add when its going for you will work out. If you get your better price add, cancel the press bets add. If you get your better price add, you can either move your stop down slightly but increase it to include all shares, or place a second stop lower on this second add – it’s up to personal choice. If you get the press bets add, move your initial stop up to just below that low of the 5 minutes, and make sure you increase the shares.

2. You are dead wrong on the direction

This does happen, even to the best traders. You try a breakout that fails, you try to catch a turn at the bottom of a downtrend, you think a stock will follow another stock with bad news down … the common element is you are dead wrong. Usually these types of trades will be self evident from the get go – meaning within a few minutes its already far further against you than it ever went for you AND it does not oscillate. By this I mean the upside is severely limited (for longs) or downside limited (for shorts). This means it can move easily one direction, but really, really struggles in the direction you bet.

Usually if you see this happening, the only chance you have is to try to double down near your stop. You basically would risk another 15-20c on double size that it would bounce before you get stopped out, or sell down before you stop on shorts. If you try this you really have to be disciplined. Do not expect to make money on the trade. The goal is to minimize the loss by trying to catch a turn near your stop area. If you can cut the loss in half or even get to even, get out. Move on to the next trade.

Advanced method when this happens would be to move the stop up on all to just below the turn IF you doubled down and actually caught the turn. When it goes halfway back from your second entry to your first entry, sell the add position. Keep your stop on the other position just below the entry for the add position. The thinking here is you possibly washed out the side that was causing it to go so far against you, so give the rest a shot. Because you made a bunch back with the added shares, if you get stopped you will lose less than if you did not do that. It really is a judgment call whether that is the appropriate play or just to exit all with a minor loss and move on.

3. News items come out and move stock or index against you

This is a tough one. You have to be able to analyze the news very quickly AND decide the impact. The judgment is would this news cause the stock to go far enough to stop me out? If the answer is probably yes, exiting at market before the stop will save you money. If you think there is a chance the news would not stop you out, the plan is to exit the position on a counter move the other way. Most of the time there is no good way to add shares to trade out of a news play where you get caught. Occasionally the market will react in way A, but a few minutes later they realize they are wrong (or someone made a bad assessment, and the market is changing its mind) and react in way B. IF you can detect this will probably happen or see it happening, the add point is the high of the bar where the news came out, that break in price. Usually that will run stops and trap whoever was playing the news as a quick trade and force them out.

4. Your price target to exit is too far away

This is common to. You have to kind of guess based on how the stock has been trading, localized volatility, and support resistance points where a price move might go to. It is very common to think it can move to A, but it struggles to get to even half of A. Usually these types if you don’t monitor them real close will turn into losing trades. The main reason is a scale up seller (for long bets) or scale down buyer (for short bets) is betting the other direction and absorbing a lot of the volume.

Most trade setups attract attention, so the more obvious a trade looks, long or short, and it does not really do that or struggles, the bigger the indication is to get the heck out. Some of these can result in a huge move the other way because they trap lots of short term money in the stock trying to trade whatever setup happened. There is no real method to add to work your way out of it, you really just need to pay attention. A general rule is if you think its acting weak and think you should exit – just do it. Your gut is telling you something, the stock is not trading just right for the trade setup. Getting out is the best solution because you are looking to avoid your stop getting hit and saving a bigger loss. Also realize if you exit early, and then see it was a mistake, you can always get back in with a click of the button.

One last word – do not fall into the trap of trying to make money on every trade. If you sense something is off or wrong and you are at a loss, take the loss and move on. Sticking around and trying to always make money will actually result in bigger losses eventually. You can think of the God rule – When a trade goes wrong, (God) gives you one chance to get out – it’s up to you to realize the chance and take it.