Stock futures are trading higher, as the S&P 500 and Dow look to extend all-time highs. It’s been an incredible run for the overall market…
And a great market to trade…
A couple weeks ago, I did a reset, and started a $3K challenge…
The account is up over 70% going into today’s trading day.
(I have developed a 5-Step Plan to trading small-cap penny stocks, if you’d like to receive my real-time trade alerts then click here to get started)
Of course, not every trade is going to be a winner. And that’s important, because if you trade my style, you’ll have to get comfortable taking small losses.
But if you trust the process and study my lessons, the results should follow.
(Missed this alert and trade? Don’t miss the next one)
You see, I trade stocks to make money.
Not stroke my ego.
The other day, I was long some bitcoin stocks over the weekend that turned out to be duds (the market rallied off the trade truce news but bitcoin sold off).
Waking up to a losing position isn’t fun for anyone…especially on a Monday. However, we are still left with a decision to make:
- Do you double down to try and improve your price point?
- Do you get out right away and respect your stop?
- Do you wait for the market to open, give it some time, and see how it plays out?
Now, if you wait too long or hesitate, it could end up making things worse. And if you make the wrong decision, it could turn into a disaster. Knowing how to take a loss is sometimes just as important as knowing when to take profits.
What’s my solution?
Traders win and traders lose… it’s all part of the game.
Let’s face it, when you’re trading stocks, you’re going to win and lose… if you’re a successful trader, your win rate is going to typically be higher than your loss rate.
The key to trading is not losing it all on a few ideas.
That’s probably why you always hear Wall Street traders say 90% of traders fail.
Now, that number is most likely inflated and affected by survivorship bias… but a bulk of those who probably did fail was due to a few reasons… the main reason: being a bag holder.
You never want to be a bag holder… and it’s actually easy to do that when you’re trading penny or momentum stocks that move quick.
In other words, you don’t want to be the one holding a stock that’s breaking below key levels and crashing… leaving you with massive losses and a damaged trading account.
If you were a bag holder at one point or another… I’m sorry to hear… but you could’ve avoided that all.
By having a game plan and respecting your stop loss areas.
The way I do it is by looking at my charts and identifying key areas where I should be out of a position. You see, chart patterns work extremely well when you’re trading penny stocks…
… and I’ve found a few chart patterns that are easy to use… and let me know where I should take profits and stop out.
For example, it actually happened recently, and I avoided being a bag holder.
There’s An Easy Fix to Avoid Being A Bag Holder
Well, if you didn’t hear… Bitcoin broke above $10,000 recently – a key level. Of course, Penny Pro traders were finding stocks that were affected by Bitcoin on this move.
Plays like these…
Here’s a look at the NYSE Bitcoin Index.
As you can see, BTC broke above $12K, hitting a recent high of around $12,800… only too pull back. I’m sure some people bought near that high thinking it can run to $20K again… only to realize they were stuck with the bag.
Now, before this recent crash in BTC… I was actually long some Bitcoin-related stocks like BTCS Inc. (BTCS)… thinking it could run further. We were already doing well with Bitcoin plays… and my patterns were working really well.
That said, I ended up buying BTCS once it broke above a key level.
See the blue rectangular area?
Well, if you look… there was one bar that told me this thing could run up even higher.
Now, I actually had a plan in place and was watch some key areas within that blue area. Basically, I was watching BTCS, and if it broke below a key area… I knew that these Bitcoin plays were losing some steam, and I should get out.
Throw the “Don’t Frown, Double Down” Mentality Out the Window
Well, some traders aren’t actually looking for these levels. More times than not, if they don’t have a plan… and the stock is moving against them… rather than stopping out and take a small loss…
… they end up doubling down. In other words, they buy more shares as the stock is moving against them. In their minds, they’re probably thinking, Well, I have a better average price and if the stock runs up… I’ll make so much money.
However, what typically ends up happening is they take on too much risk… and once the stock breaks below a key area on the chart… the floodgates of sellers and short sellers come in… increasing the supply of the stock.
Thereafter, they take too much pain and realize they’ve destroyed their accounts and were left with the bag.
Now, if you were trading Bitcoin stocks and doubled down instead of stopping out… well you would’ve been a bag holder.
For example, Bitcoin was approaching a key level at the time, and if it broke below that… and who knows, this thing could continue selling off and get back to $3,000.
Sure, I traded BTCS (a Bitcoin-related stock)… but when it pulled back… I didn’t continue to double down to get a better average price.
I actually stuck to my plan, saw the stock break below one of the levels I spotted… got out of the trade, only to watch not only Bitcoin to break down and approach the $10K level…
… causing BTCS falling further from where I stopped out and approaching a key support level… If it breaks below that, well who knows where BTCS would be… so I’m glad I stuck to my plan and took a small loss.
Have Stop Losses in Place
Now, you’re probably wondering how you can develop a trade plan…
It’s actually pretty simple.
First, have a reason you’re getting into a stock and identify key levels where you would buy and add the stock.
Thereafter, look for an area where you are comfortable stopping out below. For example, maybe you can use a key support level. Now, you can actually place in your stop order ahead of time so you don’t have to deal with the emotions and figuring out whether you should double down.
More specifically, you could place a stop-limit order. For example, if you’re trading a penny stock and you bought shares at $1.00… and you’re willing to give this stock 10% to the downside (assuming you properly allocated your risk and didn’t max out your account on this one trade).
Well, you could place good til’ canceled (GTC) stop-limit order with a trigger price at say $0.95. In other words, your limit order won’t become live unless the stock trades at $0.95 or lower. Thereafter, the limit order can be placed at $0.90 (10% from where you bought).
Now, if the stock traded at $0.90, you would automatically sell your position… and you would just take a small loss in relation to your account size. No emotions, a quick and painless loss… and you’re on your way to finding new trades after.
For example, after I took some small losses in some Bitcoin trades… I was able to get back on the horse, and find trades like this…
You see, it’s okay to take small losses. What’s not okay is doubling down and being a bag holder. If you take a small loss, you live to trade another day… If you want to learn how to build your account and avoid “bag holding” situations, then you’ll want to check out my 5-step plan here.