I am just beginning to trade and was wondering if you can help me with the issue of taking losses. A simple example to explain what my problem is: Let's say I buy ABC at support for 56 expecting it to bounce. I set a mental stop at 55.95. The trade goes against me and I see prints 55.99, 55.97, 55.95..... No problem, I am getting out. The problem is that more often then not the stock having just broken through support is beginning to run, I see prints at 55.90, 55.88 before I can blink my eyes. The spread widens and is 55.85X55.99 or something like that. Most of the time I panic and sell at the market - for 55.85 in this example. Technically speaking I observed my stop loss, maintained my discipline and got out of the losing position when the stop loss price was hit. On the other side my actual monetary loss was much larger than I had planned. When I analyze the trade I usually find out that even though the decision to close the position was correct, the price I got was the worst price of that bar and the next several bars. If I did not panic and waited a little longer I would actually be able to get out with my original 55.95 price or close to it. I tried that approach on a few occasions and when my stop was hit and the bid was way down I decided to wait a little believing that there would be some small bounce and I'd be able to get a better price. Of course in those cases the price kept going down and never looked back, I eventually got out with much larger losses - exactly what I was trying to avoid in the first place. So I was wondering if there is a better way to actually set and take the stops. TIA Dennis
You got out at your stp loss, but actually got filled at bigger loss. It's called slippage. Nothing much you can do about it. Cheers!!
Sure there is. You consider the stock's liquidity and volatility when deciding on where to place your stop and size your position accordingly. Slippage can take a lot of cash out of your pocket, you'd be smart to plan for it.
Two things come to my mind...you could place your bid 10-15 cents lower than the obvious support level, try to take advantage of the guys who bought it above 56 and are having second thoughts. Give yourself a little cushion and some extra upside if the support holds. Or if you feel your 56 long was a terrible play and you really want out, say your stop is 55.90, well make sure you don't miss it by putting out your order a few pennies through the 'bid' when you see the 95 cent bids getting knocked down. Let's remember support and resistance points aren't going to be exact to the penny, especially in a 56 dollar security!!
A .05 stop is probably too tight for just about any stock over $10.00 per share - you'll get shaken out too much - If your trade was well planned you should have a little more room for the natural ebb/flow of prices and still do OK. Many of my trades go against me up to .20 but I am usually setting up a trade that nets .60 + It also depends on the stock and what kinds of spreads it has. Some stocks have a .10 or .15 spread or more so if you have only .05 stop loss than one tick stops you out. All those little losses add up to a big one... Think Risk vs. Reward - 3 reward to 1 risk ratio - then you can be wrong 1/2 the time and still make money. Good luck and please skip the biggest mistake I've made as a rookie trader and DON'T JUMP THE GUN - WAIT FOR CONFIRMATION OF THE MOVE BEFORE PULLING THE TRIGGER - pick good setups and don't overtrade. Regards, Paul PS none of this is my own original thinking - it was all shared with me here on ET
Although there are guys who can do this (manage the exits when their stops are hit) I cannot. A number of times I tried, and, as you did, ended up screwing it up and getting out worse. Even worse than this, a couple of times I managed it so well, that I didn't get stopped out at all, and made money on the trade. While this may sound positive, it is not, as it ends up forming very bad habits which you eventually pay for. My advice. Use (your) method 1 every time without question, especially given that you are just beginning to trade. Yes, you will often get stopped out at the worst possible price. Yes, it is incredibly annoying. But it would be even more annoying if, in trying to manage a stop, you weren't around to play tomorrow. I've seen it happen, and I've also been there (obviously I was also undercapitalised for the size I was trading at the time as well. Ahhh, the joys of learning this business). The price keeps going against you, your hard-won discipline goes out the door, the price keeps going against you more, you start getting muddled, clear thinking follows discipline out the door, and you freeze. Now, my stops are paramount, no matter what the slippage. If you are trading the correct size, even a 2 S/D slippage event won't hurt you much. Plan for this slippage as a cost of doing business.