How I Deal With Winning Trades Going Sour
Whenever I sit down to write my twice-weekly column or one of these trading lessons, my goal is to get to the
heart of the matter while attempting to keep my writing at least somewhat
interesting. I could go on and on in many cases. However, I realize the most
important thing is to get to the point, make it informative and hopefully make
you a better intermediate-term trader in the process.
With that in mind, this
lesson will just get right to the point.
What do you do when a profit in excess
of 25% evaporates right in front of your eyes?
As rare as this situation is, it
happened to me recently. As painful as it might seem at the time, it usually
spells even more trouble ahead for the stock.
Back in March, when stock after stock
was exploding from basing patterns and blasting to new highs, I bought Phone.Com
(
PHCM |
Quote |
Chart |
News |
PowerRating) breaking out of its own solid, basing pattern. Its 13-week
cup-with-handle pattern left nothing to be desired. Volume was coming in at all
the right places and the day-to-day price action was tight. More importantly,
the two-week handle it formed was even tighter. Moreover, the company had the
leading Internet software product in the explosive field of hand-held
Internet-access devices. Simply, it was a leading stock in leading group at the
time.
I bought the stock breaking out from
its basing pattern on March 9 — volume was huge. And although many of the
winning stocks in my portfolio were well into climax runs or rallying into
extended positions on weak volume — sure signs of exhaustion, the leading Nasdaq
Composite had only recorded one distribution day so far into its ascent and
other stocks were still emerging from basing patterns.
Got to take this trade. Can’t miss,
right?
Following its breakout day, the stock
catapulted the next day on big volume. Wow! Two days into the move and I’m
already up 32% on my position. Should I sell? What the heck, why not take the
nice quick profit and run?
No. 1, stocks that breakout and run
like this normally have the propensity to end up being big winners. Just check
out many of the stocks that broke out of solid basing patterns during the Nasdaq
Comp.’s fourth-quarter run. Many of the big winners acted the same way, as have
many big-winning stocks in the past — even during less phenomenal advances in
the market.
Actually, as an intermediate-term
trader, the proper course of action, as I laid out in the Kuhn/Marder Trading
Course, is to raise one’s stop-loss to the purchase price once a stock has
advanced 25% or more above cost. It’s one thing to give back a gain in excess of
25%, but downright bad money-management to take a loss.
Here’s the point: The Nasdaq Composite
topped on March 10 and immediately headed lower — as did Phone.Com. Three days
later I was out at my cost of $157 and the rest is history. Check out what
eventually happened to the stock.
As painful as it may have seemed to
give back the profit, I will tell you this: I’ve only found myself in a similar
situation a handful of other times in the past. In every case, it indicated
something was going wrong in a major way and the stock eventually just totally
caved in. In this case, the whole market was about to get whacked big time!
Despite the situation, I was being fed
important information from the market. And any time I can get clear-cut
information from the market, which isn’t always the case, win or lose, I’m
always happy to listen. I gave back a profit, but look what the market’s
information kept me from getting into — a clear disaster.
This is what having a sound set of
disciplined rules in your trading is all about. Have your rules and let the
market trade within them. You control it (the market), not the other way
around!