In reference to our last article on trailing stops I was asked:

A quick question on stop losses. What does one do when the stock you are long on, opens down with a huge downward gap the next morning?

For eg : Your stop loss if trigerred will give you a loss of $ 1 only, but the gap down open did not give you a chance to square off. If squared off after the open will result in $ 5 loss which is 5 times the initial stop loss.

Your stop losses are trigerred, yet you don’t want to sell because you think it is only a knee jerk reaction and markets would recover soon.

What does one do in such a situation? Square off saying – stick to the rules or is there another way out.

This becomes a personal decision on how you want to handle those situations.

You see there is no “right” answer, let me explain…

If the day the stock opens gapping down, and you decide to sell, then by the close of the day the stock manages to close the gap, you’ll figure “Hey, I should have just held that and I wouldn’t have incurred this $5 loss.”

So next time you decide to wait for the stock to close the gap instead of selling at the open. But this time when the stock gaps down instead of closing the gap it continues going down creating a bigger loss.

The fact is you only know the absolute correct course of action AFTER the fact. Now you can do your best to analyze the situation by reading intraday charts, and weighing the likelihood of both scenarios, but in the end you can only analyze so much.

I’ve seen it time and time again traders constantly floping back and forth in these type of scenarios feeling the market just has it in for them… “Last time the market closed the gap, this time it didn’t… I just can’t win!?!”

This is what you want to avoid. The market has nothing against you… it doesn’t know you… it doesn’t care about you.

The key here is to maintain your sanity, and I believe the best way to do that is to choose a single course of action and stick with it. One way or the other you’ll maintain your trading composure.

Categories: Trading

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