Stop-Losses Are Good, But Mastering Your Emotions Is Better
Let’s recap what’s been happening in the markets (and our portfolios) over the past couple of weeks…
Heading into the long Labor Day weekend (and the printing of our last issue), we saw a quick and steep selloff in the markets. The Nasdaq bore the brunt of the selling pressure, sliding just over 10% — into correction territory — from its September 2 high.
The quick selloff has a lot of people feeling nervous. It’s understandable. The steep selloff we went through during March when the Covid-19 pandemic took hold was painful and is still fresh in our collective memory.
Thankfully, my followers and I over at Maximum Profit did not have to wrestle with the decision of whether or not to sell with each individual holdings. The decision was made for us.
During the action over the past couple of weeks, we triggered a few stop losses in our holdings. The first two were closed out for gains of about 32%, and 16%, respectively. The first trade beat the broader market 3-to-1, while our other trade essentially kept pace with the broader market.
When markets opened back up on Tuesday, September 8, stocks continued to slide. It triggered a stop loss in our longest-tenured holding, DocuSign (Nasdaq: DOCU), which we added to the portfolio six months ago on March 20.
While our DocuSign trade did wonderfully (another triple-digit win), it provides a crucial lesson for traders that I constantly preach. I’m talking about being able to actually close out of the trade when one of our sell signals is triggered.
(I also addressed this in some detail in this piece. I encourage you to read it when you get a chance…)
Woulda, Coulda, Shoulda…
You see, stop-losses are perfectly fine. But what can sometimes happen is a stop is hit, but we push it off one more day. We tell ourselves that we will sell on the next “green” day. What we’re secretly hoping for is the stock to climb back to its recent high… Then we will sell. Or that’s what we tell ourselves…
Take our DocuSign trade for example. Shares ripped higher more than 200% from our entry point to its peak. But as the market pulled back, so did shares of DOCU. When shares closed below our stop loss, instead of seeing a 166% return, we only see that it once was up over 236% (at its very peak).
Instead of excitement on a big winner, a lot of investors will only see that we “could have” booked a bigger winner had we just sold at the very top.
Of course, most traders would stubbornly not sell the stock, wishing it to get back to that 236% mark. This is clearly the foolish route, because what if it continues to slide?
This sort of thinking is dangerous. Forgive me if this seems harsh. We’ve all been there. But if you ever hope to be truly successful in the market, you must overcome this kind of thinking.
The truth is, we have no idea if DocuSign will find support and rebound to new highs or continue to drift lower. It’s anybody’s guess. But it’s a lot more fun (and profitable) to buy stocks that are trending up than trending down.
As I’m writing this, we are seeing continued volatility in the markets. The tech-heavy Nasdaq 100 has continued to fall since Labor Day. If we continue to see market weakness, we will likely get stopped out of a few holdings.
That’s OK. Although I find the common Wall Street maxim sort of obnoxious, it’s true: the trend is your friend.
In the case of DOCU, traders who are stubbornly wishing for shares to climb back to its recent peak, or even sell on a big up day… are still waiting. And in the meantime, they’ve lost an additional 10% in profits that they could have booked.
Again, this is a common mistake that I see many traders make. They let emotion, ego, and stubbornness dictate their trades. And they end up paying for it.
Just remember to follow those stops. We will book our gains, cut any losses, and move on. There will always be another trade, and another opportunity to make money.
P.S. My colleague Jim Fink is a multi-millionaire and an investing legend… And by deploying his trading methodology, his followers are getting rich, too.
In a new presentation, Jim reveals how you can use his strategy to extract $2,440… $5,200… even $7,890 from the market… every single week. Want to know more? Click this link for details.