Page 396 - THE MARKET WHISPERER

392 PART 11 - Risk Management

planned, and missed out on the later lows. The five-minute reversal was my
protection. It gave the stock time to cool off from the market’s movement
up, and allowed bears to keep in mind that it is basically a weak stock. The
five-minute reversal rule let me realize the trade with a nice profit.

Extreme Situation: On rare occasions, the five-minute reversal will
nonetheless cost you a searing loss. A stock might move very far against
you before executing the hoped-for reversal. These are also the rare cases
where, despite the pain, it is worth temporarily absorbing what appears to
be a loss, since generally the stock will return to its initial trend and justify
your confidence in its overall movement.

Under what conditions should you flee if the stock keeps moving against
you? This is where you need to be level-headed. Sometimes, it becomes
very clear that “something bad is happening there” even if the stock has
executed a five-minute reversal. For example, if the stock goes higher than
its intraday high [2], then that is a good reason to exit fast with a loss even
if it did not yet make the five- minute reversal. This is the only point at
which you might suspect a reasonable chance that the stock has changed
its trend. Should you be angry with yourself over this misjudged trade?
Absolutely not: you shorted a weak stock, you waited for the reversal
which almost always brings the stock back to lows, and you operated in
strict accordance to “the rule book.”

In Moody’s case, we concluded that going higher than the intraday
high was the furthest level of tolerance. With other stocks, you may not
always be able to identify the alternative exit points. What might happen
if a stock moved against you without executing the five-minute reversal,
and without your identifying a different, logical exit point at a reasonable
distance? This is an extremely rare, but possible, situation. Sometimes you
might find you have traded in a stock that intraday news has caused to
spike against you, and the price may not pull back, causing a shocking loss.
I remember this happening to me some two years ago, ruining profits I
had accrued over an entire week. Even if you do encounter this very rare
eventuality once every few years, you should still respect the five-minute
reversal rule, since in the great majority of cases, statistics will be on your
side.

What can happen, nonetheless, if the stock goes seriously against you?
Imagine a situation in which Moody’s would have risen to $20.70, and
only there starts pulling back. It is probable to assume that from this high,
it would not go back to lows. In such a case, you need to start thinking