Save money by not trading out at stop loss.
I’ve recently bought a couple of stocks in the Greek stock market and one of them fell suddenly far below my stop loss point. Although I should trade out, I did what seems like suicide for most traders following a trading system; I bought more shares! In fact, I doubled my position on that PPC stock, the national power company. Why did I do that? Not because I chased my losses but because I wanted to save money and minimize my loss. In the end I actually showed a profit! However, that was the exception of the rule: Always close your position when the stop loss is hit.
The PPC’s stock chart above indicates that the stock’s price had entered a sideways channel and my entry point is shown by the green arrow. I had set my stop loss point right below the latest low, but I was quite surprised to witness an almost 10% fall in a day a week ago. The gap that was formed in the stock graph didn’t help my confidence either and I was meant to trade out according to my trading system. Looking though to the rest of the stock graph, I saw that the stock had fallen right at the bottom of the channel the stock is trading all year long! The support level had shown tremendous strength and I decided that it was a very good opportunity to buy more shares. But what about my already bought shares?
Say I had never entered this trading position and I was looking at the PPC stock chart for the first time. Wouldn’t it seem like a great entry point for my stock trading system? I would most definitely trade that stock and setting a stop loss right below the strong support level. Now that I also held shares bought for more than 12 Euros each, would it be better to dumb them or keep them, unless the support level is broken? I decided that the most rational action was to buy more shares and hold on my initial position.
Five days later (today’s bar isn’t drawn yet to the end-of-day chart) the stock did what I predicted. It bounced off the support level to meet the moving average line. That’s an about 10% rise in just 5 days which my second trading position gained. Additionally my initial trade didn’t suffer such a loss, as now the price has overcome the stop loss I had set in the very start (11.40). Today I traded out both of the positions and while I was looking at a 800€ loss on Friday, I pocketed about 300€ in total – winning more than 500€ from the second trade and losing around 200€ from the first.
This tactic isn’t one that I suggest you follow and in fact I should have set my initial stop loss way below than 11.40. However, we learn from our mistakes, and in this occasion my lesson didn’t cost much. Besides I managed to save money by acknowledging my mistake and not trade out when the stop loss was hit.