Help With A Bad Trade

Expecting a miracle?? Well it won't happen. This article is written to deal with trying to trade out of a losing position, NOT 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. Another thing to remember, if you accumulate all your money into a portfolio of losing positions, you have nothing left to trade with. Every large loss starts as a small loss that is ignored - most of the time this is learned from taking a loss and then watching the stock turn and move in the desired direction. 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 entry timing is off, this usualy means the price will move a bit in your favor, then against you within the first 5 to 10 minutes. The amount it moves for you will be far less than against, but the stock does not really go down to your stop area. 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 easiest way to deal with this happening is to assume that your timing is going to be off. Buy or short only 1/2 to 2/3 the size you want where you think the entry should be. To help with this issue, never use market orders. Put a limit in just slightly below market, almost every time you will get 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 will not just run immediate, 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 runs in your favor immediately, well then your timing was perfect - trade what you have OR look for the remainder on a small dip.

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). If you are an aggressive trader, you can put in some additional orders and press bets above the high for longs or below the low for shorts. If you are not able to get filled on your better price add shares, the press bets additional shares will usually work out because this means there is not much selling. 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 your better price add, you can either move your stop down slightly but increase it to include all shares, or place a second stop lower on this second add - it's up to personal choice. 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. No matter what you try it fails, breakouts, reversasl, or trend following - common theme is you are just 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 are looking to risk another 15c to 20c on double size, betting it will turn in your favor before you stop out. If you want to attempt this, care must be taken to use discipline. Do not expect to make money on the trade. The goal is to minimize the loss by trying to catch a turn near your stop area. If you can the loss you have in half, or even be able to get out even with no loss, take it. 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 it goes halfway back from your second entry to your first entry, sell the add position. Keep your stop on the other position just below the entry for the add position. 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 really is a judgment call whether that is the appropriate play or just to exit all with a minor loss and move on.

3. News items come out and move stock or index against you

This is a tough one. 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 to that question is most likely yes, then exiting now at the market before it hits the stop will save you additional losses. If you think there is a chance the news would not stop you out, the plan is to exit the position on a 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 market will react in way A, but a few minutes later they realize they are wrong (or someone made a bad assessment, and the market is changing its mind) and react in way B. IF you can detect this will probably happen or see it happening, the add point is the high of the bar where the news came out, that break in price. Usually that will run stops and trap whoever was playing the news as a quick trade and force 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. It is very common to think it can move to A, but it struggles to get to even half of A. If you dont monitor this type real close, it will usually turn into a loser. 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 trade setups attract attention, so the more obvious a trade looks, long or short, and it does not really do that or struggles, the bigger the indication is to get the heck out. 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 bad day trading, 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 remember if you happen to exit too early and realize it is a mistake, you can get back in the position in a matter of seconds.

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.