When stop loss doesn’t work

2011,May,25

Posteado por passiontrader a 22:35:35

As a trader, the most important thing when my trades goes against me, is to cut my loss as quickly as possible. For every trades that I put in, I will have an exit plan, both for profit and for loss. Stop loss is a must for me to control my losses. Is stop loss really useful? You bet it is, and it has help me prevent more losses in many occasions. But then, there are times when even having a stop loss might fail you.

On 12th May, I’ve bought IndoAgri at 2.02 because for the past few days, my chart shows a strong support at 2.01. I then put a stop loss at 1.99, knowing that if the price drops to that level, there’s a high probability that it will continue to fall. All went well for the week without the price breaking the 2.01 support. Then came 23 May. I switched on my computer at about 9 am and saw the stock price gap down from 2.04 to open at 1.96, a drop of 4%! It actually bypass my stop loss of 1.99!! I quickly setup my system to try to sell at the current price, only to find out that it had already drop to 1.88 in just 5 mins! Recovering from my shock, I finally managed to sell it at 1.88, and mind, am I happy to sell it, because for the next 5 hours, the stock plunged all the way to a low of 1.69 and closed for the day at 1.72.
There are a few lessons that I’ve learnt from this disaster.
1. On 10th May, company had issued a statement saying that one of their subsidiaries in Indonesia is going for an IPO in the Indonesia Stock Exchange. I know that this is going to affect the stock price of IndoAgri in Singapore. I should have wait till the confirmation is out and not take such a risky trade.
2. After the announcement is made on 10th May, there isn’t much movement in the stock price. This should have tell me that investors are not really excited about the news. It’s a clue that I did not notice at that time.
3. When my stop loss was not done due to the gap down, the next best thing to do was to sell as quickly as possible to protect my capital. It’s painful to lose money, yes I know, but it’s going to be more painful if I lose even more. Stock price gap down for a reason, and the reason is usually not a very good one.
Stop loss is a must for all traders, but it’s not a guarantee that you will not lose more because you have stop loss. The most important thing is your reaction when your stop loss is breached. What do you do when that happens? Do you have a plan for it? Have a contingency plan so that you know what to do when it happens. This, I guarantee, will save you a lot of money and stress.