Stick with a losing trade until it becomes a winner?

Have you every exited a losing trade then watched in agony as the stock took off without you? Well, "IT" happens.  However, you can reduce the chances of this occurring by placing your initial protective stop outside of the normal volatility of the stock and by sticking with the stock as long as the stop isn't hit.

Let's follow up on Gerdau Sa ADS (GGB | Quote | Chart | News | PowerRating), mentioned recently. Following the rules outlined in my Swing Trading Primer (email me if you need a copy), a stock of this price and volatility would require at least a 1 1/2 point initial protective stop (and equal profit target). Notice the stock triggers an entry but fails to follow through to the upside. What's worst is that it sells off fairly hard over the next few days. Luckily, it does not hit the initial protective stop and subsequently rallies to hit the initial profit target.  Partial profits are taken and the  stop is then trailed to breakeven (for more on money management, study the primer). 

Of course they won't always come back and you will occasionally get stopped out. However, as you can see, it often pays to be patient and use an appropriate stop. 

NOTE: I discussed the above in more detail in last Wednesday's weekly interactive lesson. Email me if you need a link. 

On Friday, the Nasdaq traded back and forth throughout the morning, sold off in early afternoon trading, but then recovered going into the close. 

Ditto for the Ps: 

So What Do We Do? Ideally, I would have preferred for the indices to pull back more deeply. This would have been healthy for the market. Why? Because it would have shaken out some nervous longs and attracted some eager top pickers--adding fuel to the next up leg. Since the market did do this, you might want to focus on those individual issues that have. 

As far as setups, for those with big ones*, volatile Sandisk (SNDK | Quote | Chart | News | PowerRating) looks like it has the potential to resume its uptrend out of a Double Top Knockout (like) pattern. Wait for an entry though since it was down fairly hard on Friday.

Enjoy Your Holiday and best of luck with your trading on Tuesday!

Dave Landry

dave@davelandry.com

P.S. Reminder: Protective stops on every trade!

P.P.S. If you would like a free trial to my trading service, click here.

*Trading accounts