Do You Know When to Take a Loss?
This was a stock that I had traded around 18 months ago, and was responsible for one of my biggest losses. The loss was about 45%
The reason for this confession is so YOU can learn by my mistakes and it also reminds me not to get caught again. Here is the account of what eventuated.
This stock was the “flavor of the month.” It was being promoted (ramped) at a chat site.
Everything sounded wonderful, good company announcements came out which were blown out of all proportion. So I dived in to get some and couldn’t because every time that I put a bid in I would miss out as the share price was rising too fast ,and the information that I was getting was 20 minutes old.
This chasing the share price went on for at least an hour during which I was panicking and I was becoming frightened of missing out.
The final result was I paid top price for the stock which had risen over 35% on the opening share price that morning.
The amount that I had invested was just over $3,000. The market closed and I felt very satisfied that I had managed to buy in. All I had to do now was to sit back and wait for the enormous profits to come rolling in.
What I did not realize was that I was a “Mug Punter” who had been involved in a “Pump and Dump” There are several versions of this about, (Read previous article ” Along for the ride”.)
Next morning as soon as the market opened, I was waiting for the share price. (those days a 20 minute delay) To my horror the share price had dropped by 25% on opening. Truck loads of stock were being sold off by the profit takers who had bought in much cheaper in the days before I did.
What did I do? (This was the days before I knew what a stop loss was) I held on, telling myself (conning) that it was only a correction and that the share price would start to go up again soon.
Did it? Like hell! The share price continued to recede to around a 50% loss as more stock was sold off.
Rather than sell then, as I was too scared to take a big loss and admit to myself that I was wrong. I decided to place it in my new “Long Term” portfolio and wait till the share price went up.
It stayed there for another 6 months during which it hardly moved at all. During that time I saw opportunities come and go, by which I could have recuperated the loss quite easily had I sold. But I could not face up to the loss.
I did sell eventually, and used that loss to offset some capital gains I was fortunate to make. Just after I had plucked up courage to sell this stock it dropped down even further. So I was fortunate to get out when I did. And brother did I feel better.
The lessons learned were:-
1. Don’t chase share prices.
2. Have a stop loss in place. (Always)
3. Most important Do Your OWN research. Don’t believe all you hear.
4. Watch out for PANIC and GREED .We all suffer from these emotions occasionally.
5. If it sounds too good to be true it usually is. (Back to step 3.)
6. Always be aware of traps in trading. There are sharks out there who are experts in pumping and dumping and eating you up and your money too.
7. Get “real time” data. You can see what is happening NOW! I personally use E-trade. But there are others equally good around.
8. Just because it looks good, doesn’t mean it is. (Go back to step 3.)
Incidentally I have bought that same stock again, which I bought back at a considerably lower price than what I sold them for.
But I still like the basic fundamentals of the company BUT they are definitely long term as they are an emerging company. OR am I conning myself again???
I wish you profitable trading.