Keeping Your Losses to a Minimum

We wrote a little bit about keeping your losses to a minimum since letting a losing trade get wildly out of control will you dearly. So we got we would like to share with you a question:

"I agree with your idea of ​​bailing out of a trade quickly before it snowballs into something ugly. I think that's why we use stops. But I have a question about that. What do you do when you buy a stock on Monday and ends the day right about where you bought it. But Tuesday opens and drops down 50 cents from there, hitting your stop. Did we have to take "the stopover

What a good question and the answer will need any explanation. We usually do not want to get involved with the first half hour of trading. It is the first opening 40 minutes of trading, where the overnight market orders are always processed where the economic data of the morning get "knee jerked around" and generally is usually a good time to avoid.

So, what does one do when a stock opens the next day and it is your stop? In general, the best thing to do is ignore your stop. Why? Again, the market is at its most volatile during that open, and more often than not the first few moves are not indicative of what will happen to the course of the day. Even if it is, we usually see a decent bounce once the first movement occurs.

In other words, we have an example. You buy GLXX on Friday. You pay 20 for it. But Friday closing at just 20.02. You had a tight stop set at 19.70. So, we see the Monday morning market is a bit of a funk, the futures are a bit red, and sure enough GLXX opens at 19.70 and starts inching lower. In 5 minutes it is 19.60. If you stop your honor, you lost 30 cents.

Now let's say it's going to be a bad day. After trading down to 19.60 GLXX bounces and gets to 19.90 but then it starts fading. The market is soggy. The time now is 10:10 GLXX and slides back down. If it hits 19.70 we would take the table and bail. Yes, you took a loss, but it's just 30 cents and at the end of the day GLXX is at 19.50. You did well.

Now let's say instead is the kind of day where funk of the morning disappears. Again, you bought a 20 to his opening 19.70 it trades down to 19.65 and then "levels out". By 10:10 the market is perking. The DOW just went green. The NASDAQ is perking. GLXX 19.85 and is now inching higher. You love it and find that when the final bell rings, GLXX is at 20.15. You won.

The key was to not stop off at the open in both cases. When a market opens sour and we are already underwater bell at the opening, we take the mechanical stops away. We want to see if it really is going to be a bad day or if it's just morning funk, and you can not know that until a time lag. Surely you do not want this out of hand! We mean when it opens at your stop and then ten minutes later it's down to say 19:40, we would probably sell the first meaningful bounce and wonder what the heck went wrong! But you know what we say. We will sell on the open. Rarely or never You can usually "better" by waiting for a bounce, and there is always a bounce. If the bounce and keeps the market is warming, chances are that you end up back in the green or at least, a drop of a few cents. It's not easy to watch, but gets taken on a gap down will usually find yourself kicking yourself.