A lot of people get discouraged when they are stopped out of a stock early on, only for it to go on a ‘rip-roaring’ tear for the remainder of the day. In fact when this happens, it often causes traders to be weary of using stop-losses at all and rely on their own instincts to cut the losses when they occur. This is probably the worst thing that one can do and can take you out of the game faster than you can imagine.
I’m hear to tell you that getting stopped out of trades is a part of life. Furthermore, getting stopped out of a trade pre-maturely only for it to go on a major run soon thereafter is also going to happen to you as long as you trade with stops. The sooner you come to grips with this reality, the better off you will be.
Stop-losses IS NOT a perfect science. Every time you get stopped out doesn’t necessarily mean that the stock you are trading in is going into the crapper. Instead you should be placing your stops at a strategic point on the chart that should the price of the stock hit your stop, you know that there is a strong or likely possibility that the behavior of the stock itself is diverging from the thesis that propelled you to buy the stock in the first place. When that happens you WANT to get out.
It is also worth noting that just because you get stopped out, doesn’t mean that you can’t get back in, but there has to be a reason for jumping back in. Probably 99% of the trades I get stopped out of, I never get right back in. For me the trade as detailed below was just a bad trade and I moved on. I instead bought me some shares of the S&P UltraLong (SSO), which actually allowed for me to recoup my losses in TIE as a result.
Today my trade in Titanium Metals (TIE), which I initiated last Friday, had a stop-loss at 15.23. As you can see in the chart above, it didn’t take long for me to get knocked out of this position, which occurred early this morning. What was extremely discouraging was seeing the inverse head and shoulders form, and subsequently rally up a half percent on the day.
I’m not going to sugarcoat it at all – it sucked – considering the strength that the market was exhibiting early on I thought such a thing might happen – and it did. Nonetheless, my stop is, in essence, an insurance policy from a stock blowing up my portfolio and taking me out of the game. But as long as I manage my risk and therefore my losses, I stay in the game and allow for myself, the chance to succeed.