Thursday, August 21, 2008

Remember your stop losses

This last investment in GS reaffirmed my rule for stop losses. They are a must. The way I play the game makes them a must. I don't want to be sitting around waiting for my stock to rise to break even so that I can have my money back; or risk that not happening within the month (or at all). It locks up my funds. I'd much rather cut my losses early, realize that I made a mistake, and reassess my position. Also, I do not want to take my profits too early. I've done this recently: taking my profit when a stop loss would have protected me as well as increased my gains. My intc and apple exercise is another example of the importance of the stop loss. If I didn't use one I would probably have gotten out of Apple yesterday, missing out on the drop today. I'd move the stop down to ~176. INTC has been a little easier to follow, but I still may have been tempted to take profits today. I'd move the stop loss down to 23.40. Maintaining stop losses prevents premature covers and excessive losses. (INTC = 6.1%; AAPL = 2.2%)

As for how close to put the stop loss, I find a lot of people make it rather subjective. Personally, I like something around 1% when I start, although I'd really like to tighten that up. The reason I go with 1% is because if I can't buy in or short without setting off a 1% stop, I feel that I wasn't accurate enough with my technical analysis. I tend to buy in or short near support/resistance levels, MAs, when stochastics are turning and volume is increasing or decreasing. I really shouldn't be losing more than 1% on a trade if I read the chart and calculated its pros and cons correctly.

Once I switch to sogo, my stop loss techniques may change. With the ability to make a trade for $1.50 there is little reason to worry about commissions taking an unhealthy portion of my account. If I want to test the waters, so to say, I could even put a smaller amount of money into a stock and add as it moves in my direction or allow the stock to go against me further than 1% (my losses wouldn't be as great because the amount invested was smaller). I'd also like to invest in several stocks at once; maybe, strive to divide my account among four stocks all with a certain percentage on the stop loss. I can cut losses and focus on the successful trades, averaging out the gains and losses, the later which would be significantly less than the former (for the most part, at least). With the lower commission price, all of this will be possible for me. My account is not large enough to justify losing $4.50 ($9 both ways) trades. I'd have to make $900 for the commission to be 1% of my trade; $90 for the commission to be 10% of the trade. (And all trades are not winning; as has been made apparent from my posts). With sogo, a $300 gain would allow the commission to be 1%, and a $30 trade, 10%. Much, much better.

Which is the reason why I am in the middle of moving my account. I have to allow several days (three or so) until all of my equity trades are cleared; another three days or so to transfer my money to my bank, and another few days to send the money to sogo. It should ultimately be worth it. This will definitely make it feasible for me to achieve a 1% overall weekly gain, and reasonable for me to set a goal somewhat higher. I'm thinking that after I can prove to myself that I can maintain an average of 1% over a two month period, I can push for a 1.5% or 2% average weekly gain. With my smallish account, that shouldn't be extraordinary of a goal. But, as with everything, we'll see.

Further notes: I'd continue to hold off on the NVDA trade. If it can break through the 50 day and hold, it should be a good position to have. If it can't (and it hasn't) I'd wait patiently. It has potential, but don't rush it.

Update: If Apple can't break 171 tomorrow, I'd strongly consider moving the stop even lower, perhaps even taking profits around 1-2 above the low of today (i.e. 173 or lower). Then again, I tend to have a bullish bias towards Apple. It tends to feel strong to me, despite its oscillations.

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