If you’re trading the stock market, whether day trading or swing trading, respecting your stops is crucial to longevity in the game. Without it you have the potential to blowing up your account and losing all of the profits you’ve made in a single trade. I was recently reminded of that (in a good way, no I did not lose all my money) but actually RESPECTED my stop and stopped out of a trade even though I did not want to. I will outline it below.
The stock was TSRO. On the morning it was gapping down on some news, I really don’t care what or why, but rather what the chart and price action was telling me. It appeared on my scanners so I looked into it. The daily/weekly/monthly charts were all somewhat bearish, with the stock moving lower. This gave me a short bias to the morning. I looked at some key levels, took my entry short around 55.70 and let the trade work from there, with a stop out above 57 or so price maintaining.
The stock opened and shot up a bit, giving me a better entry really than I got, and I should have added, given my thesis. The flush came shortly after the open and I got my move lower, covering 50% of my position into 54.50 to take some early green on the day. The stock continued its move lower, respecting VWAP continually. This gave me confidence to add to my short, so I did around 53.75. I picked up another 50% shares to make my position back to a full 100%. TSRO immediately flushed lower and dropped on big volume into 53-52 area where I had thought we might find some support. With the luck of the irish, I sold 50% of my position once again at the very bottom on the day, 52.20.
Besides being ecstatic about hitting that bottom before the reversal, I also decided to move my stop down to the 54 area. Contemplating where I wanted the stop, at first 54.50, then 53.75, I decided on 54 due to some price action and chart analysis from the weeks prior. I told myself if this thing jumps back up above $54 and holds price, then I probably don’t want to be in this anyway, as if it is truly bearish and going to continue lower, it most certainly will continue trending, and any pops up should get immediately sold off.
Well, it hit my stop at 54, and I was a bit bummed as I was still bearish on this today, but also knew I had to respect my stop. Luckily the stop hit and the market order went out at 53.92.. great an even better fill than I had hoped for! I watched the stock on and off the rest of the day, but as you can see once it broke 54, that level immediately became support and it really just grinds sideways the rest of the day, bleeding out all shorts still in their morning positions. Had you not have worked your core position, nor stopped out, you could have had a decent morning entry, but ended up even by the end of the day.. or worse, red.
If you’re shorting the stock long term, this doesn’t apply to you obviously. But for day-traders out there, if you haven’t already, do yourself a favor and add this rule to your playbook: RESPECT MY STOP LOSS. Trust me, it will save you a lot of $$ and headache in the long-run and it might suck taking that loss initially, but statistics are in your favor and if you want to survive in this game then you need to be consistent and keep that edge.
Brandon
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