Page 392 - THE MARKET WHISPERER

388 PART 11 - Risk Management

Time-based Stop

It may happen that you entered a stock and it has gotten stuck. It makes no
difference if that occurs when you have made a small profit or loss. It is just
not conducting itself in the way that you had anticipated.

First, you need to understand that there is a good reason the stock has
stopped moving. Generally, you will not know the reason, but it is probable
that something is happening. For example, when you buy an up-trending
stock and it gets stonewalled by sellers, it is reasonable to assume that
the buyers will soon despair and start looking for the exit door.You, like
others, have noticed the perfect technical formation and bought, hoping
for success, but it is best that you are among the first to exit.

How much time should pass between your entry and your exit? The
answer depends on each trader’s personal experience, but if you want a
guideline I would say that if it has not “provided the goods” within ten
minutes, then something not good is going on. When a stock stops moving,
I exit! When stocks are not moving fast, they usually will not move at all.

I realize that sounds very simple: “Not moving, so exit.” In reality, it is
not simple at all. Our brains resist clicking the button. We believe we have
made a good choice, and we are afraid that in the end it will be a success
but without us if we exit. Yes, this is a tough psychological decision, but
you need to persevere and click the button. If you stay with the stock,
chances are high that first it will “visit” your stop point and then it will
either succeed or fail. Remember that you entered the stock because you
believed that it needs to move fast in the planned direction. If that did not
happen, you have made a mistake. Now you are in casino territory. You
leave nothing to luck. Take your money, even if you are in loss, or no more
than a small profit, and invest it in a more successful stock. Keep in mind
that discipline is the name of the game.

The Five-Minute Reversal Stop

This is the correct technical stop, but it is not necessarily the correct stop
for every trade. This is the stop that requires the toughest nerves of steel,
which are not usually in the arsenal of novice traders. When I enter a stock,
I never know if I have chosen the precise entry point. I enter a strong stock
trending up at a correct technical point or execute a short in a weak stock,
but the stock or the market may not “agree” with my entry choice.