Ways To Turn A Loss Into A Profit
Expecting a miracle?? It probably will not happen. This is intended to help traders get out of a losing position by trading, not as an excuse to ignore stop losses. Ignoring stops is the surest way in the world to take all the money in your account and just flush it down the toilet. I am serious. While that might help you in the short run eventually there is a 100% chance you will have a massive loss, like 50% or more on your money lost that is invested in the trade if you don’t use a stop. In addition, you will accumulate a portfolio of losing positions and have no more money to trade with. Every huge loss starts with the trader refusing to take a small loss – often times as a result of taking a loss or a stopout and then watching the stock turn in their favor. So the thinking is “They are not gonna get me this time”. This is how traders learn to trade with bad habits.
The first thing to realize, there are 4 reasons losses that can happen when you are in a day trading or swing trading.
1. Timing is off on the entry
2. The direction you think the stock will move is just wrong
3. News items come out and move stock or index against you
4. Your price target to exit is too far away
We will address these one by one.
1. Timing is off on the entry
If your timing is off on the entry (the most common), usually that means the stock will go a little for you, then move against you within the first 5-10 minutes. The amount the price moves against you will be way more than any profit so far, but it does not go to the stop area either. This can be identified by the price hesitating and moving up and down, just below your price for long or just above for short. It should not make a beeline against you and it should not go right near your stop in the first few minutes.
The best way to deal with this type of trade is to assume most of the time you trade you are going to be off. Enter long or short only one half to two-thirds the actual size you want in a position where you think the timing is right. To make sure this never happens, do not use market orders. Place a limit slightly below the current market quote, most of the time you will have no trouble getting filled. Obviously you need to be aware of the trade type – if it’s a breakout and you don’t think you will get filled if you don’t use market, then for sure just go in. Most trades you enter will not immediately run in your favor, including breakouts. Once you receive a fill back, make sure you place an initial stop loss for that position. Wait 5 minutes and see what the stock does. If it moves in your favor immediately, that means you r timing was spot on and you just trade with what you have as a position.
Most of the time the best deal is to stick with day trading what you have. If the stock moves against you more than for you in the first 5 minutes, but is not a beeline against you (meaning it looks like the trade will stop out etc), then put in an order to add at the low of this 5 minutes (for long) or the high (for shorts). In addition, if you are aggressive, put in another add order (press bets) above the high for longs, or below the low for shorts. IF you don’t get your better price add, usually this press bets add when its going for you will work out. If the price moves so that you can add at a better price, then make sure you cancel the press bets add shares. If you get filled on your additional shares, you can move your stop down slightly but increase to include all shares OR just place a separate stop on teh add. If you get the press bets add, move your initial stop up to just below that low of the 5 minutes, and make sure you increase the shares.
2. The direction you think the stock will move is just wrong
This often happens to even the most seasoned traders. You try a breakout that fails, you try to catch a turn at the bottom of a downtrend, you think a stock will follow another stock with bad news down … the common element is you are dead wrong. This type of trade is easily identifiable from the start, within a few minutes it has already moved further against you than you expected to make if you were right from the start. By this I mean the upside is severely limited (for longs) or downside limited (for shorts). This means it can move easily one direction, but really, really struggles in the direction you bet.
Usually if you see this happening, the only chance you have is to try to double down near your stop. You basically would risk another 15-20c on double size that it would bounce before you get stopped out, or sell down before you stop on shorts. If you want to attempt this, care must be taken to use discipline. Do not try to force making money on the trade. The goal is to minimize the loss by trying to catch a turn near your stop area. If you can cut the loss in half or even get to even, get out. Just move on to the next trade.
If you doubled down and actually caught the turn, you would want to move the stop up on all to just below the turn. When the price moves halfway back from your secondary add position to the price of your first entry, sell the additional shares so you are left with only your original position. On the additional shares you want to keep you stop to just below that entry. The thinking here is you possibly washed out the side that was causing it to go so far against you, so give the rest a shot. Because you made a bunch back with the added shares, if you get stopped you will lose less than if you did not do that. It is your call to decide if that is the best thing or to just exit all of the position with a minor loss and move on.
3. News items come out and move stock or index against you
This is arguably a tough situation. You have to be able to analyze the news very quickly AND decide the impact. The judgment is would this news cause the stock to go far enough to stop me out? If the answer is probably yes, exiting at market before the stop will save you money. If you think that the news that came out will not stop your position, then the best plan is to exit on a small counter move the other way. Most of the time there is no good way to add shares to trade out of a news play where you get caught. Occasionally the price might react in way A, but after a bit of time that side realizes they are wrong, and they flip around and want out, moving the market in direction B. If you can uncover and notice that this will probably happen, the add point is the high of the bar where the news came out. Most of the time that will run any stops and trap traders playing the news as a quick trade, forcing them out.
4. Your price target to exit is too far away
This is common to. You have to kind of guess based on how the stock has been trading, localized volatility, and support resistance points where a price move might go to. I can be commong for a trader to think a stock will move to point A, but it cannot even push to half of A. Usually these types if you don’t monitor them real close will turn into losing trades. The main reason is a scale up seller (for long bets) or scale down buyer (for short bets) is betting the other direction and absorbing a lot of the volume.
Most chart setups will attract trader attention and the more obvious a trade looks but does not work or really struggles, the bigger th indication is to get out immediately. This can result in a huge move the other way, as traders are trapped on the wrong side. There is no real method to add to work your way out of it, you really just need to pay attention. If the stock appears weak (meaning it should be going up but its not) and you think you should exit – usually this is the right thing to do. Your gut is telling you something, the stock is not trading just right for the trade setup. Getting out is the best solution because you are looking to avoid your stop getting hit and saving a bigger loss. Also realize if you exit early, and then see it was a mistake, you can always get back in with a click of the button.
One last word – do not fall into the trap of trying to make money on every trade. If you sense something is off or wrong and you are at a loss, take the loss and move on. Sticking around and trying to always make money will actually result in bigger losses eventually. When a trade is really going poorly, usually you will be offered one chance to get out – it is up to you to capitalize on it and take it.
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