kingrichards
04-23-2009, 09:31 AM
Importance of Having an Exit Strategy
We work tirelessly to bring our members what we feel are the best opportunities in the small-cap space. In fact, we research both the fundamentals and technicals to bring our members only ideas with the best risk-reward scenarios. If you've followed our newsletter very long you have of course seen many huge winners, and possibly pocketed some big gains for yourself in the process!
With that said, sometimes a stock simply does not behave in a manner consistent with our expectations. Yesterday's alert on OPMG was a perfect example.
While we congratulate many of our early, nimble members in their ability to capture some, or all of OPMG's decent 17% intraday gain, we would like to remind everyone of the importance of cutting losses quickly when a trade is not working. This is meant to be a lesson not specific for OPMG, but as an overall rule to make you a better trader!
Why do we mention this? It's simple. Every 50% loss you've ever had has started with a small 10% loss. And did you ever stop to realize that if you let a stock drop by 50%, it has to regain 100% just to break even? So while no one likes to take a loss, the best traders on Wall Street take lots of little losses just to stay in the "game" long enough to hit that "home-run". In fact, we hear that the most successful traders at New York Stock Exchange "make their year" on only a handful of winning trades, and chalk the losers up to the cost of doing business.
The most commonly asked question is, "If I am in a losing position, when do I sell and take my loss." Unfortunately, there is no fool-proof answer. However, experts agree that every trade should be made with an exit plan determined IN ADVANCE of the trade. The idea is to remove the emotional aspect of trading and treat it like a business.
Although there is no fool-proof strategy as to when to cut your losses, we have provided you with a few ideas to explore based on your own risk tolerance. As always, please note these are our opinions and not investment advice of any kind.
1) Sell a stock if it drops 2% or 3% below its support level (often a multiday low where buyers have stepped in to prevent further price decline.) In the case of OPMG, 60 cents is arguably a key support level since buyers have prevented the stock from penetrating that low for the last couple of days. A drop to, for example, 57 cents might warrant a consideration to sell at least some of the position. In the case of OOIL (which was our idea from earlier this week that ran as much as 50% higher) members should take defensive actions if the stock breaks the 35 cent range.
2) Sell a stock if it drops below the low of the current trading day, or the low of the previous day. If a stock that shoots up but either cannot build on those gains, or even worse, is met with heavy selling, the stock is telling you something is not right and should be watched carefully on a 1 or 5 minute chart.
3) Determine IN ADVANCE the amount you are willing to risk on a trade (for example $500) and sell the stock WITHOUT HESITATION if violates that money management stop. In fact, it's always a good idea to have the sell order "cued" on your broker's platform early enough to react quickly in case the selling speed intensifies.
Bottom line - set an amount you're comfortable with losing, and if the stock price reaches that then sell right away. Don't let losses get away from you as you may never get them back!
4) Gaps. Most of us have been in a stock that "gaps" significantly higher at the open. More often than, the gap's durability will be tested once some of the buying enthusiasm has waned. What this means is that the price will come back down and test the level where the gap in prices occurred...and usually hold as a new support level. If, however, the selling intensifies and the stock begins to trade either lower than the current day's low, or worse yet, the previous day's low, an order to sell at the market should be made without hesitation.
Remember, the best traders on Wall Street know how to accept losses as a cost of doing business and never treat it as failure on their part. As famed Fidelity Magellan Fund manager Peter Lynch explained, he was right only 60% of the time at best, but knew to let his winners run and to prevent a tiny loss from turning into a an unrecoverable loss. Bill O'Neal, founder of Investor's Business Daily also reminds traders that if they keep their losses to only 6%- to 8%, they can be wrong two times for every one time they are right and still avert disaster.
We work tirelessly to bring our members what we feel are the best opportunities in the small-cap space. In fact, we research both the fundamentals and technicals to bring our members only ideas with the best risk-reward scenarios. If you've followed our newsletter very long you have of course seen many huge winners, and possibly pocketed some big gains for yourself in the process!
With that said, sometimes a stock simply does not behave in a manner consistent with our expectations. Yesterday's alert on OPMG was a perfect example.
While we congratulate many of our early, nimble members in their ability to capture some, or all of OPMG's decent 17% intraday gain, we would like to remind everyone of the importance of cutting losses quickly when a trade is not working. This is meant to be a lesson not specific for OPMG, but as an overall rule to make you a better trader!
Why do we mention this? It's simple. Every 50% loss you've ever had has started with a small 10% loss. And did you ever stop to realize that if you let a stock drop by 50%, it has to regain 100% just to break even? So while no one likes to take a loss, the best traders on Wall Street take lots of little losses just to stay in the "game" long enough to hit that "home-run". In fact, we hear that the most successful traders at New York Stock Exchange "make their year" on only a handful of winning trades, and chalk the losers up to the cost of doing business.
The most commonly asked question is, "If I am in a losing position, when do I sell and take my loss." Unfortunately, there is no fool-proof answer. However, experts agree that every trade should be made with an exit plan determined IN ADVANCE of the trade. The idea is to remove the emotional aspect of trading and treat it like a business.
Although there is no fool-proof strategy as to when to cut your losses, we have provided you with a few ideas to explore based on your own risk tolerance. As always, please note these are our opinions and not investment advice of any kind.
1) Sell a stock if it drops 2% or 3% below its support level (often a multiday low where buyers have stepped in to prevent further price decline.) In the case of OPMG, 60 cents is arguably a key support level since buyers have prevented the stock from penetrating that low for the last couple of days. A drop to, for example, 57 cents might warrant a consideration to sell at least some of the position. In the case of OOIL (which was our idea from earlier this week that ran as much as 50% higher) members should take defensive actions if the stock breaks the 35 cent range.
2) Sell a stock if it drops below the low of the current trading day, or the low of the previous day. If a stock that shoots up but either cannot build on those gains, or even worse, is met with heavy selling, the stock is telling you something is not right and should be watched carefully on a 1 or 5 minute chart.
3) Determine IN ADVANCE the amount you are willing to risk on a trade (for example $500) and sell the stock WITHOUT HESITATION if violates that money management stop. In fact, it's always a good idea to have the sell order "cued" on your broker's platform early enough to react quickly in case the selling speed intensifies.
Bottom line - set an amount you're comfortable with losing, and if the stock price reaches that then sell right away. Don't let losses get away from you as you may never get them back!
4) Gaps. Most of us have been in a stock that "gaps" significantly higher at the open. More often than, the gap's durability will be tested once some of the buying enthusiasm has waned. What this means is that the price will come back down and test the level where the gap in prices occurred...and usually hold as a new support level. If, however, the selling intensifies and the stock begins to trade either lower than the current day's low, or worse yet, the previous day's low, an order to sell at the market should be made without hesitation.
Remember, the best traders on Wall Street know how to accept losses as a cost of doing business and never treat it as failure on their part. As famed Fidelity Magellan Fund manager Peter Lynch explained, he was right only 60% of the time at best, but knew to let his winners run and to prevent a tiny loss from turning into a an unrecoverable loss. Bill O'Neal, founder of Investor's Business Daily also reminds traders that if they keep their losses to only 6%- to 8%, they can be wrong two times for every one time they are right and still avert disaster.