Is Cutting Your Losses Short Hurting Your Performance?
Should You Stay With A Losing Trade Until It Turns Into
A Winner?
“Cut your losses short” is an old Wall Street adage. The
problem is, if you don’t give your positions enough time and room to work,
you could be exiting right before a big move takes place. As I’ve said recently,
obsess before you get into a trade, not afterwards. Therefore, as long as
you’ve done your initial homework and have the market, the sector, and the stock
behind you, then give your positions time (and room) to work. Let the
market “prove you wrong” by taking out your protective stop. Let’s
follow up on KLA-Tencor
(
KLAC |
Quote |
Chart |
News |
PowerRating), mentioned on
03/28/05 as a potential
short.
As I subsequently wrote on
04/05/05: “Moves take time to develop and often
‘head fake’ before resuming the trend. Therefore, you have to give the position enough room to
‘breathe.’ For a stock of this price and volatility, a stop/initial profit target of around 2 points is about right (this is based on the guidelines outlined in my primer on swing trading, see
below).”
Notice that after some sideways trading, the intended move finally
ensued. Partial profits could (and should) have been taken and the stop was
then trailed lower. Of course they don’t always work out this well. However, as
you can see, as long as you are exercising proper money management (e.g. using
stops), it pays to wait for when they do.

Once again, if you’re new to momentum-based swing trading and would like more information on the basics such as trend, entries, and money management, email me and I’ll be happy to send you the primer section from
my second book.
I also have a an introduction to shorting article for those who are not familiar
with playing both sides of the market.
On Thursday, the Nasdaq generally worked its way lower
throughout the day. This action has it breaking down out of its shorter-term
sideways trading range.

The S&P put in a similar performance.

So what do we do?
I think the big blue arrows speak
for themselves. This is especially true now that indices are breaking down out
of their trading ranges. Therefore, avoid the long side. On the short side,
since we have quickly become oversold, you might want to wait for a bounce
before looking to establish new positions. Instead, look to take partial profits
and trail your stop lower on existing positions (e.g. on stocks mentioned recently such as BTU,
KLAC, etc..).
No setups tonight.
FYI
I have the recording from Wednesday’s audio/visual show.
I covered many recent examples such as KLAC (mentioned above). Email me if you
would like this link the links to prior shows.
Best of luck with your trading on Friday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. Learn my newest and most advanced version of my Bow
Ties Strategy. Click
here for details.