Adjusting Stops when stocks Gap down below your Stop?

Discussion in 'Strategy Development' started by jsmooth, Mar 15, 2006.

  1. jsmooth

    jsmooth

    Every so often I’ll be holding a swing trade over night, and it is hit with some bad news after the bell, causing the stock to gap down (BELOW MY MENTAL STOP PRICE) in after hours, and also (below my mental stop) at the open the following day. But it will either open or show some consolidation at a support level (or buy point that I had prior to the bad news)….my question is this, how do you adjust your strategy/stop when something like this happens? Do you basically just sell and get out of the position with a loss and move on to the next trade or do you tend to sit on the losing position and hope that it doesn’t break down below the support and then try to just break even?

    A recent example of this would be the price movement of PG the past 3 days…..I’ve been playing PG on the long side during this whole run up to the 52 week high of 62.50, and have been a buyer during the pullbacks to the 50dayMA…..so I was long PG (61.50) prior to the news Monday after the market close (they lowered guidance and raise the divy) the stock gapped down to its 50 day (-3% - 59.60) (passing my mental stop just under 61.00) Tuesday morning then basically settled around $60 Tuesday and Wednesday…..so it was leaving me holding a losing position….but what makes this more difficult is the fact that I would be a buyer right at the 50dayMA (around 59.60) support level (which it bounced off of).

    My question is this…..how do you adapt/change your stop order strategy when a losing position bounces off a support level that you would be a buyer at? Just hope it runs up to your break even price, or place a new stop just below the support level? Or take the loss and move on too the next trade?

    With regard to my PG position…. I sold shares at 60.10 (Tues), and went short (today/Wed) at 60.05 – still holding…. I do not believe this is a good trade simply because I based my decisions on emotions…..
     
  2. I don't Swing Trade Stocks, but you've just answered all of your own questions ...

    Design a mechanical model and STICK TO IT!

    You will not stay in the game except as a dabbler if you continue to break discipline. If you have a good swing trading model, breaking discipline should be much worse than taking a loss ...


    ... and if you don't have a good trading model, you should work at it until you get one that works for you and will prove to be more profitable than what you are currently doing (there are plenty out there!).

    Best of Luck,

    Jimmy
     
  3. An opening gap below your stop is one of the worst things that can happen to you if you are a short term trader. You just have to accept that you are screwed and make the best of it. Usually the stock will retrace into the gap. Sometimes the gap open is the low of the day. Sometimes it will open and continue to go down, although usually NYSE issues will open at a level where there are buyers. Since you have no way of knowing what will happen, it is highly likely that whatever you do will be sub-optimal.

    If a stock was trading near its high of the move and gapped down on some minor news, I'd be awfully tempted to hang on to it for a few days and see if it recovered. Otherwise, I'd look to sell within the first 30 minutes into any buying that showed up. Another tactic is to treat it like you had bought the opening print and trade it from there.
     
  4. Honor your stop by exiting the position, then wait for a new signal to enter again.
     
  5. jsmooth

    jsmooth

    But the problem with that is....you will be selling below your stop (into demand), AND at a price that you would be a buyer.....is that truely the best strategy?

    thanks for the reply
     
  6. jsmooth

    jsmooth

    Interesting....thanks for the advice AAA.....good luck trading!