Is your first loss really your best loss? Let’s take a look at TWTR, SSYS and JUNO. (May 01, 2015)
Here’s what I want to talk about today; it won’t take too long but I’ve got some things and this is a perfect way to start. There’s an old concept in trading called “your first loss is your best loss.” What that means is if you’re wrong on a stock, you’re losing money and you know you’re wrong on it, you need to take that loss. You can’t sit here and white knuckle it, like so many people do, to say, ” I can’t afford to sell it now, I’ve lost too much money, I’ll wait for it to come back.”
I can’t tell you the number of people that I’ve seen say in “Stock Market Mentor,” actually I haven’t heard that in a long time, you guys are learning in the forum, but somebody will say. “Well I can’t afford to sell it but I’ll wait till I get my money back. Once the stock moves back to where I bought it, or even close it, then I’ll go ahead and sell it.” If you knew that the stock was going to do that wouldn’t you buy more? “Well I’m not supposed to average down and buy myself out of a loss.”
Well, that’s right. But aren’t you essentially doing the same thing intellectually when you’re saying, “Well I’m not going to take the loss, but when the stock moves up to where I bought it then I’ll go ahead and sell it?”
Okay now you’re assuming that you’re always going to be able to get your money back, and you can’t. Okay, on Stratasys ( NASDAQ:SSYS ) for example, this stock, kind of a high short interest, that didn’t work out too well, it worked out great for the shorts but there was no bounce. The stock closes here at 39.93 and you’re saying, “Well I can’t afford to sell it, I’ll wait till it gets back up to 50.00.” Now two days later it’s down to 36.71. Had you said, “Well, my first loss is my best loss and this thing really smarts.” You go ahead and sell the stock, you would have avoided losing another 8 percent, you’d have sold it 8 percent higher than the stock is now.
You look at Twitter ( NYSE:TWTR ), you got stopped out here but it was just a mental stop and you couldn’t believe how the stock was trading. So you’re still holding the stock right into the close, the stock closes at 42.27, but by golly you didn’t sell, you knew you were wrong but you didn’t sell. You didn’t sell on this day, you didn’t sell up here when your stop was hit, you’re going to wait till the stock snaps back. Right now you’re clutching your desk, knuckles are white, and you’re hoping the Goggle or Facebook buys Twitter ( NYSE:TWTR ), right? Well, because you didn’t sell there you’re down another 10 percent here.
Juno ( NASDAQ:JUNO ), “juno” that this is another good example? Juno ( NASDAQ:JUNO ), a breakdown below the 50-day moving average; “Crap, I know I’m wrong here; I wasn’t expecting this, because I thought that this was going to hold and the stock was going to bounce higher, so I can’t sell it here, I can’t sell it at 50.81, I’m going to wait until it comes back into the 60.00’s.” Now, you didn’t sell it at 50.81; you were probably one of those guys that sold it 17 percent lower, because you freaked out because you thought the stock was going to zero.
So you took this big loss ultimately, or you’re still holding it hoping, yet again, that the stock is ultimately going to get up into the 50’s or 60’s, and it might. But the issue is, your first loss was your best loss. Even if it’s taking a big loss, if you can get used to just taking your licking and keep on ticking and then, if you need to, look for a better entry where the stock truly looks like it’s done going down, then you’re going to do just fine. You’ll take these big losses once in a while, but the loss that you would have taken here, with Stratasys ( NASDAQ:SSYS ), is not as great as the loss that you’re sitting on right now. Same thing with Twitter ( NYSE:TWTR ), hopefully this goes up, but right now it just looks like a dead stock to me.
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