Tag: avoid losses

  • How to recognize early warning signs to exit the trade

    How to recognize early warning signs to exit the trade

    recognize early warning signs to exit the trade
    What can make or destroy the trade is the right exit point. Don’t hold on to trades in the hope of making just a few more dollars when the market is moving against you.

    By Guy Avtalyon

    As a trader, you’ll often consider possible profit when you have to decide about exits, but can you recognize early warning signs to exit the trade? Traders Paradise wrote many times about the importance of exit strategies in trading stocks, forex, or currency. And I have to repeat if you think about the level where you enter the trade without thinking about your exits, it’s more likely you’ll end up in losses.

    Some early indicators can warn you it’s time to exit the trade.

    I know it’s sexier to buy stocks. We all like it. The feeling is wonderful after you spent so much time examining stock, analyzing it to find the perfect one. How would you feel if your stock is not performing well? What about your attitudes? Do you feel like a loser?  No one likes to watch the stock go down. Even if it is obvious that the stock is performing badly, most of us would hold it and wait for better times. What is behind this attitude? We want to avoid the feeling of loss, the experience of losing something. Contrary, when the stock price increases, most traders will sell the stock to lock-in profit and lose the possibility of further gains.

    Anyway, it’s important to sell stock at a specific moment to prevent further losses, and you have to recognize early warning signs to exit the trade. But what they are and how to recognize them?

    Recognize early warning signs to exit the trade

    Getting out of the trade isn’t complicated, but it requires research of price action, finding and noticing signs that could predict a reversal or changes in trend. 

    You have to know that markets tend to trend between 15 and 20 percent of the time. Strong trends are helping in the consolidation of recent price changes. They are helping in taking profits, lower the volatility. But what if a trading range becomes bottom or top and exits in the opposite direction of the previous trend swing?

    This could be one of the early warning signs to exit the trade. When you’re watching the price action and notice a failed breakout or breakdown, the best strategy is to exit the trade.

    Failed breakouts or breakdowns are signs to exit the trade with profit or loss. You can re-enter the trade when the price surpasses the breakout high or low of the breakdown. That could be a logical move after recovery because the possibility of the underlying trend to resume is great. It’s also possible the price moves to the other side of the trading range and forms a strong trend in the opposite direction.

    High-volume days as an early warning sign 

    Well, to notice these kinds of early warning signs to exit the trade, you’ll need to track the average daily volume. For example, observe the last 50 sessions. It’s easy to notice trading days with four times or higher volumes. That’s a good sign if it happens in the direction of the position you are holding but take it as a warning sign if it is opposite from your position. This is exceptionally valid if the opposing swing breaks an important support or resistance level.

    High-volumes that oppose the direction of your position could ruin patterns. They are often a signal to exit the trade and to take the profit in an uptrend.

    Also, pay attention to peak days that can stop trends. They could show four or five times average daily volume in price bars that reach new highs in an uptrend or new lows in a downtrend. The top bar shows up at the end of a price swing after RSI indicators scored uptrend or downtrend levels.

    Moving average and trends can help to recognize early warning signs

    Take a look at these three lines: 20-day EMA, 50-day, and 200-day EMA. It could be a difficult position if, for example, 20-day EMA descends through the 200-day EMA. Also, when 20-day EMA ascends through the 200-day EMA. The first example signals the danger for long positions, while the second is important for short sales.

    Price actions are also early warning signs to exit the trade when the intermediate moving average is higher to sideways on long positions. The change from lower to sideways on short sales also is a warning. Don’t hold or wait for the moving average to change the slope. Exit the trade.

    Be adaptable, not emotional. 

    The market isn’t always moving in your favor. So, never force your initial targets further away. This could lead you to loss or fewer profits than you awaited. But before you exit the trade, you have to understand whether your decision is a product of emotions or logic. If you move your target far away from your initial plan, you’re actually showing greed. Don’t do that. You must have a strategy and stick to it. Your strategy must be well pre-planned. If the market moves against your stop-losses, you have to exit the trade. Move your stop-losses only to reduce possible loss. If you exit the trade before the stop-loss target, you’ll probably miss the possibility of making a profit when the market shifts and starts to move in your favor.

    When you enter the trade, make adjustments only if necessary. The most important is to keep the balance and reduce the risk.

    Honestly, there is no best strategy to exit a trade. One strategy could work properly for some trades but lead to a great loss in others. But one thing is true, so many researches showed that you’d end up in losses more often if you fail to stick to your strategy.

    Risk is an integral part of trading. You have to watch market movements and set proper risk management strategies. The exit strategy is an important part of them. Moreover, the exit strategy can decide your profitability in the market.

  • How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?

    How to Cut Losses in Trading Stocks?
    The first and most important lesson in trading stocks is damage control. One of the methods is by cutting losses.

    By Guy Avtalyon

    This is the essence of trading – how to cut losses immediately. You have to learn this because it is something commonly named as damage control. And if you are not ready for the worst-case scenario and you get panicked, your losses in trading stocks can be enormous. One single bad move can destroy your trading account. 

    Not all trades will be winning, so you have to know how to cut losses in trading stocks.
    First and principal, you’ll need a good trading plan. The best plan is to exit a losing position and cut losses when the trade doesn’t match your plan. So, the trading plan is mandatory.

    Every single trader in the world has had or still has losing trades. That isn’t a problem. The main problem is how to cut losses and have control of your trades. You are the one who makes decisions and we are pretty sure you wouldn’t like to have a great loss. There are some methods that will give you a chance to reduce the losses. And here is how to cut losses in trading stocks.

    How to cut losses in trading

    Learn from the kids. When they just start walking it is normal to fall but every single time they will get up and continue walking. The same is with trading stocks. Every trader at some point will experience losses but the true wisdom is how each of them controls the damage. Damage control means cutting losses quickly without hesitation and quickly. So how to cut losses in trading stocks quickly? 

    There is some unique rule: when your stock falls for 7% – 8% it’s time to exit the trade. If it is so simple why would we spend so many words to explain how to cut losses? 

    Well, it isn’t that simple. When you have a losing trade and exit after your stock drops for a significant amount, you’ll have to compensate for that somehow, you’ll have to reclaim your loss. There is some math behind losses. 

    For example, let’s say you bought a stock at $100 and after several days its price dropped 7% to $93. What you have to do? You’ll exit the position, of course, and enter the other trade to recover from the loss. But where is the math? Here. You lost $7 on a single trade, right? And now you’ll need to profit more than it is the case if you didn’t have that loss. Your available capital is $93 now and your gain has to be 8% on that capital invested to cover the previous loss. It isn’t so hard you might think. Yes, your profit is actually zero now.

    What will happen if you hold that stock?

    Let’s say you are pretty sure that your stock will bounce back and it will be worth $150. And you are brave enough to enter the next trade. But the stock market is cruel, it doesn’t take care of your wishes and says you have to think, to make calculations and not to make wishes. What if your stock drops at $50 which is possible. 

    The math behind says you’ll need a 100% gain to cover your loss. That is a bit harder than to reclaim 7%. And, be honest, how many stocks, that can double their price, you own? So it isn’t a smart decision to hold a stock further if it has a 7% or 8% decline. A smart decision is to close the trade with reduced loss and find the new winner.

    The logical move is to cut losses quickly

    The understanding of how to cut losses in trading stocks will help you to protect your overall portfolio. Put your emotions aside, you might love that stock, adore the company but you have to admit that holding a losing stock is dangerous. No, you didn’t buy that stock at the wrong time or you have bad luck, your losses come from your behavior. Your small mistakes turned into a big failure. 

    When trading stocks or any other asset, the main goal is to profit. So, why would you like to hold a loser? 

    If you avoid selling such a stock you are avoiding blame, right? You have to understand that every single human makes mistakes and bad choices. All the time. So, what? It isn’t a problem. The true problem is when you don’t want to admit yourselves you are making mistakes and they cost you a lot. 

    Why would you stay to hold such a losing position? 

    Maybe you hope your stock will bounce back to the buying price and sell it? That isn’t going to happen. Well, it will happen one day in the future but your losses will be bigger and bigger. Nothing will help you to “delete” this mistake. Why? What had a tendency to fall, will continue to fall. In most cases.

    That’s why it is very important to understand how to cut losses in trading stocks.

    If the pattern doesn’t work, exit your position

    It is possible for a pattern to turn against you. There is no other way than to take a loss. Don’t hesitate to exit the position. You don’t need to wait for your trade to become a loss. Even a small gain is better than a small loss. Frankly, small gains are what beat markets every day. Many experts will advise you to get out of the trade with a small gain in case your pattern is working against you. If your stock doesn’t do what you expected and planned, just cut it. In this way, you’ll stay in control of your trades. 

    For example, you bought some high-tech stock in a high spike of your interest. Let’s say it is a new company with a great prospect, with a new product, everything is excellent. In theory, such a stock should skyrocket immediately. Excellent pattern, you may think. But what if the stock misses rising? What if you expected the price could rise up 30% and it hit 25% and suddenly stopped rising? Will you wait for it to fulfill your expectations? If you’re smart enough you’ll get out.  

    Why are we so resolute about this? 

    We assume you have a trading plan before you enter the trade and you shouldn’t care if you could make $1 or $100 if your pattern is working against you. It has to work what you require. Otherwise, get out because you don’t have control of your trade. That is how to cut losses in trading stocks by following your trading plan. If you do that you’ll don’t need to wait for the trade to become a loss. You’ll be able to exit exactly on time and cut potential losses.

    A few ways of how to cut losses in trading stocks

    First of all, you must have a trading strategy. That means you must have all rules on-hand, no matter if you want to buy or sell the stock.
    Further, you must know why you are buying a particular stock, but also, it is mandatory to know why you are selling it. You have to have a criterion. So, set rules for each situation.
    The most important action in trading is to set stop-loss orders. And here is one suggestion, be smart and never adjust stop-loss order when the stock price is dropping, do it when it is growing.
    Analyze your portfolio on a daily basis. Consider why you are still holding some stocks. If you can’t find any reason, sell it, sell them more.

    Controllers when trading stocks 

    Even before entering the position, you’ll have to know how to control your emotions. This is extremely important when you are faced with losing trades and have to cover losses. Always keep in mind that losses are part of trading stocks and learn how to handle your emotions when the bad time comes. For that to achieve, you have to be prepared for every trade with understanding that you may have losses. You are expecting them. That will help you to defeat your emotions. During this long run, you’ll have failures, successes, difficulties, and you have to know how to handle them.

    Further, invest only the amount you can afford to lose. In short, always protect your capital. If the stock price runs against you, cut it. It is better to exit the position than to suffer a bigger loss. Limit the risks. For each trade, you must estimate the risk/reward ratio.

    If your trade goes exceeding the risk you planned, cut it, cut the potential losses. And do it quickly, especially if the stock price reaches your stops. Just don’t hold the position and follow your plan. Never think you can wait a bit more. In a few seconds, your small loss could easily turn into huge losses. Give yourself the space to come back to the game.

    Successful traders aren’t unreasonable and think ahead. By doing so they are prepared to adjust their position size if necessary.

    In trading, it isn’t always possible to avoid losses. Honestly, it is almost impossible. But you can reduce them only if you learn how to cut losses in trading stocks. There is nothing wrong with selling a stock at a loss but do it on time to minimize it. When you cut losses with a clear head you’ll be ready to return to the market. Yes, we know, it’s hard to have a sharp mind when you are faced with the potential loss of thousands of dollars. Just follow your trading plan, stay with it, and follow the basic rules of trading. Nothing more, nothing less. The market always recovers. You will too.