Page 394 - THE MARKET WHISPERER

390 PART 11 - Risk Management

up with the stock into territory where you should not be finding yourself
in the first place, you need to handle it using the five-minute reversal
rule. Unfortunately for me, this was my situation with Moody’s. The stock
literally shot up and I did not manage to exit at the planned stop.

While the stock was moving up, I had no clue where it might stop. It
could have gone another dollar higher without looking back. I was short
3000 shares, with a loss of more than $800, so that every ten cents the
share price rose increased my loss by $300.

What would you have done, fled or held on? Once upon a time, as a new
trader, I would have run like a frightened rabbit, absorbing the loss, and
been sorry afterwards when the stock pulled back. Not anymore. Now I
simply realize that the stock “did nothing bad.” There was no argument
about the fact that the stock was weak. The chances are strong that it
would reverse into lows, but during the process of falling, it might also
trend up briefly even if I am in a short, or even if I am losing my pants. All
I need to do is wait until commonsense and the weak stock’s downtrend
take over again. In most cases where a weak stock moves up with the
market, as in this case, it stops and then reverses back down--which is
what happened, happily for me, after the reversal [2]. What might have
happened had it not reversed? I would have lost a good deal more, but that
too would have been okay. I have no problem with losses as long as I know
I am operating correctly, and then I do not get angry with myself. To start
with, you should not reach this level of loss, but if it does happen to you,
manage the situation correctly from the technical aspect. In this case, the
correct technical management requires placing a stop above the reversal
point [2] and hoping for success.

Quantity Test: Think about what you would do in my place, if you had
bought 3000 shares. Would you exit, or wait for the reversal? Would you
do the same if you had bought 1000 shares? 200? Only 50? If your answer
relative to a quantity of 50 shares, which creates a $13.5 loss at the pullback
peak, is different than your answer for 200 shares, then your problem is
not the method but the quantity of shares you are trading in. Conclusion:
reduce your size. The day will come when together with your cumulative
knowledge, experience and confidence, you will start increasing size.

Moody’s executed a reversal in five-minute candles [2], returning to a
downtrend, and closed the day with a drop of 6%. A trade that started well
continued in the possible-error zone but eventually ended brilliantly. The
five-minute reversal principle states very simply that if you get caught in