Could a simple stop-loss adjustment save your entire portfolio? In the volatile world of trading, making the right moves at the right time is crucial. This article shows you how to effectively adjust your stop-loss during a trade, ensuring you minimize losses and protect your investments.
The Importance of Stop-Loss Orders
Stop-loss orders serve as my safety net in trading. They protect my portfolio from significant losses by automatically selling my position when the price hits a predetermined level.
And why do I rely on stop-loss orders? Because they take the emotion out of trading. When the market gets rough, I don’t have to make snap decisions—I’ve already set my limits.
Recognizing the Signs to Sell
I notice when my stock price falls for 3 or 4 consecutive days or stays below key moving averages. These signs indicate it’s time to sell. Ignoring these signals can lead to larger losses.
Have you ever hesitated to sell, hoping for a turnaround? I have. But those hopes can quickly turn into regrets when the stock continues to drop.
How to tighten Your Stop-Loss
I adjust my stop-loss by tightening it as the price moves in my favor. This strategy locks in profits and limits potential losses if the trend reverses. It’s like setting a safety net closer as you climb higher.
Why should you tighten your stop-loss instead of loosening it? Because loosening it is like giving your stock more room to fall, which increases your risk of bigger losses.
The Dangers of Loosening Your Stop-Loss
I avoid loosening my stop-loss, as it can lead to greater losses. It’s tempting to give the stock more room to recover, but this often results in deeper losses.
What’s the alternative? Stick to your plan and keep your stop-loss tight. This way, I protect my gains and cut my losses quickly.
Real-Life Example
Consider a trader who ignored the signs and loosened their stop-loss. They hoped the stock would bounce back, but it didn’t. Their losses grew, and they regretted not sticking to their strategy.
Learn from this mistake to avoid the same pitfalls. Keep your stop-loss tight, and you’ll protect your investments more effectively.
Details at a Glance
Red Line 50-day simple moving average line (see SMA 50 below)
Black Line 200-day simple moving average line (see SMA 200 below)
Opening
- Underlying: SHAK
- Date: 16 May 2024
- Underlying Price: 102.98
- Stop Loss: 96.80
- Position Risk, %: 5.94
- Position Risk to NL, %: 0.28
- Profit Target: 123.58
- Potential Profit (position), %: 19.81
- Risk to Reward Ratio: 0.30
- Market Outlook: Confirmed uptrend
- RS Rating: 93
- RS Line Trend (U/N/D): N
- Industry Rank (X / 197): 11
- Volume U/D Ratio: 1.1
- Institutional Ownership Trend (U/N/D): U
- Position Size, %: 4.66
- Why did I open this trade at that point?: I bought the stock because the price was slightly above the psychological 100 level and at its key moving averages, the EMA 21 and SMA 50. This made me think that it was a relatively safe buy. Additionally, the stock is in a leading industry and has fairly good fundamentals.
- Was it an ideal buy?: No, the stock is not breaking out of its base.
- Remarks: It is not entirely a CAN SLIM stock because the sales growth does not meet the required criteria; it is 14% instead of the minimum 20%.
Closing
- Date: 21 May 2024
- Price (close): 98.94
- Market Outlook: Confirmed uptrend
- RS Rating: 89
- RS Change: -4
- Remarks: Even though the fundamentals for the stock are fairly good, the price, RS rating, and RS line have started to slide. The volume wasn’t very big, but the price has fallen, so I was forced to close my position.
Results
- What went well?: Since the price had been below key moving averages, such as the EMA 21 and SMA 50, for several days, I raised my stop loss, and the position was very soon stopped out.
- Cause of Error / IMPROVE: Since the stock price was below its key moving averages, I should have sold it earlier.
- Lessons Learned: If you adjust your stop loss, you can only tighten it, never loosen it.
- Position ROI, %: -5.80
- Position ROI (portfolio), %: -0.27
- Position Open Time (trading days): 4
- Position Open Time (days): 5
- When to sell: 3-4 days of price decline or lingering below key moving averages.
- Adjusting stop-loss: Tighten, never loosen.
- Key moving averages: EMA 21 and SMA 50.
Terms and Definitions
- Stop-Loss Order: An order to sell a security when it reaches a certain price.
- EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.Pivot price is the optimal buy point of a stock is defined as the moment it transitions from a stable basing area or chart pattern and begins to achieve new highs in price.
Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.
U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.
RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.
RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.
Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.
Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.
Conclusion
In trading, proactive risk management is key. Tighten your stop-loss at the right moments to protect your portfolio from significant losses. Remember, never loosen your stop-loss.
End your trading day with confidence, knowing that your smart decisions safeguard your investments. Could this simple strategy be the key to your trading success? Absolutely.
One more thing: If you have any thoughts or questions, fill out the form here and I’ll get back to you.
