A Trade A Day

I wanted to bring your attention to a concept that the wild1 wrote about at his blog. The article is entitled Shave the Losses and the key sentence that still is in my mind is “If you are holding on to an investment/stock and you aren’t making any money off it, then why are you still holding on?”

The Wild1 made some good points about not cutting loses and that it’s important to work with losses within the context of a plan. Not cutting losses is a common problem. We all want to be right. But here’s something just as insidious. Stocks that break out and go no where. My method has a lot to do with breakouts and momentum plays. So volume and price acceleration are all critical. If the stock isn’t moving I don’t make money. If our trading capital is inventory, we need to turn it over!

The solution is as simple as adding a rule to your plan that states that X stock must move X percent within X timeframe or you exit the position. The hard part is coming up with the X’s. Testing is required. You could arbitrarily throw some numbers out there and “see how it works”, but that would be gambling.

Another way to combat a lazy breakout is to implement a rule that you will sell if the stock price touches your breakout price. A more sophisticated and potentially more effective rule might be to allow the stock to drift back into your breakout price and then add to your position when the stock reverses and heads higher. Again testing is required to come up with the best rule for your system.

The wild1 has an excellent blog that deals with investing, personal finance, and he’s even doing videos!. Make sure you check it out.

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