It happens to the best of us.
No, this isn’t a Cialis ad.
I’m referring to taking losses in the market.
Friday’s market action chopped the legs out from a lot of bulls. It didn’t matter what sector you were in—very few were spared.
Yesterday’s market sell-off was the worst drop seen in the Dow since August, as it fell by more than 600 points on fears of the coronavirus spreading further.
For the most part, I didn’t touch stocks on Friday. Call it instinct, or the fact I took some licks earlier on in the week.
I hate losing, but I know it’s part of the game.
So when Weekly Money Multiplier Members ask me – how do you exit a losing trade?
Here’s what I typically say: Whenever I’m in doubt, I exit a trade right then and there.
However, that’s the short answer.
The long answer?
As difficult as it may be sometimes, I prefer to wait until the close of a candle. Normally this is a daily or hourly time-frame. That limits my exposure to the intrabar movements.
First, let me start by saying that this really only applies to swing trades or anything that’s not a scalp trade. Scalp trades, by their very nature, should have hard stops and profit targets.
Let me show you an example of why I use candle closes. Here’s a recent trade that I was in with SDC.
SDC 130-Minute Chart
This is an ideal chart for my TPS setup. There’s a nice up-move trend, consolidation pattern, and a squeeze. Honestly, there was no reason to drop the trade other than the market.
Now, take a look at the last red candle that I pointed to in the chart. That was when I decided to take off the trade. Notice how the candle finishes near the bottom. When that happens, you typically see a bit of a retracement in the next candle.
Think about it…how many times do you see back to back candles with no wicks? It rarely happens. So, if your closing in on any time-frame near the lows, wait for a bit of a bounce on the next candle.
Here’s what that looks like in the 15-minute timeframe.
SDC 15-minute Chart
Notice the candle I pointed to was a pretty solid down candle. But, if you look closely, you’ll see that the next candle jumped up just a little bit. I know it’s not much. But when you’re trading, every little bit counts.
Evaluate Stock Momentum
You might have noticed on the chart above an oscillator graph at the bottom.
SDC 15-minute Chart
This oscillator gives me an idea of the momentum of a stock. I can use this to determine whether the stock is likely to gain any traction or continue its slide.
In the chart above, you’ll notice that as the day started, the momentum pointed lower. That let me know that I needed to get out of the trade sooner rather than later.
But, if I had decided later in the day I wanted to exit the trade, I might have wanted to give it a little room to run. By midday, the momentum had shifted higher, as denoted by the red bars turning yellow. Additionally, I had Bollinger Band support behind me.
Close Out Your Spreads Early
Longer-term option trades give us a chance to cut our losses before taking the maximum beating.
I recently wrote about the different types of strategies you can use to sell options. No matter which strategy you choose, there’s a way to limit your losses.
One of the easiest ways to know whether you should close out a spread trade is whether the stock has breached both of the strikes. If I have a call spread in for $30/$35 and the stock is at $36, chances are I should close the trade early. That lets me keep a little bit of change in my pocket.
The same thing works with Iron Condors. When the entire wing is breached, it’s probably best to close it out early. That saves you a lot of time and money.
When In Doubt Close It Out
These strategies should be used sparingly and in limited circumstances. If you’re unsure whether it’s right for you, just close out the trade. There’s nothing wrong with cutting your losses when you know the gig is up.
Part of learning to apply these techniques comes from experience. You’re probably going through many of the same pains I did.
Learn from my mistakes. Check out my free webinar where I discuss some of the easiest ways to avoid common missteps.