September 15, 2009 at 10:03 am | | Comments 1

Implementing the Time Stop

Staying patient with a position can sometimes pay off nicely.  After all, not every trade works out exactly when we want it to. It might require a little more time than we originally expected before we see that P&L turn the shade of green we were looking for, and it’s sure nice when that happens.

But there is a flip side to the coin.

Sometimes you can be overly patient with a trade, giving it more and more time (dare I say too much?), just waiting for it to make its move.  And I’m not referring to letting it move farther and farther against you – you know better than that!

I’m talking about the trade that simply goes nowhere.time-stop

Fortunately, there is a solution to the flatlining trade, which is to implement a time-based stop.  This is essentially a countdown placed on the trade, that if nothing happens by a certain time, then either an adjustment is made to stop & target levels, or the trade is simply closed out.  You know – so you can move on with your life!

After all, why tie up capital in a position which isn’t performing as expected?  Kicking a stagnant trade to the curb can translate into more money to be put toward another opportunity, plus it enables us as traders to put our attention toward something more worthwhile.

Show Me the Money!

Just this week I faced this dilemma.  I was swing trading SHLD on the short side due to the breakdown from a bear pennant pattern (see chart 1 below), but aside from the initial weakness, there was no follow through (see chart 2 below).

I had designated 2 targets for my exit, and of course 1 stop loss in case the stock reversed and went back above resistance, but none of those levels were reached.  The stock refused to go down far enough for me to start booking profits (according to my trading plan), and yet it wasn’t bouncing enough to stop me out either.

Chart 1:

shld1StockFinder Chart courtesy of Worden

Chart 2:

shld2StockFinder Chart courtesy of Worden

Although SHLD was certainly underperforming the market, and I felt confident if market weakness ever arrived that SHLD would crack pretty good, that never happened.  The stock simply formed a trading range, and I began to realize it was essentially a stagnant trade.

Time to Move On

Over the weekend, I decided I’d give the stock through Monday before making any moves, and so when it remained in its range, I tightened my stop heading into Tuesday, and today as the stock reached my adjusted stop I closed the position for a minor loss.

I know what some of you are thinking… Why give up on what might eventually develop into a good trade?

Don’t think of this as surrendering or giving up on a trade, because I know that can be difficult for traders who don’t mind being patient.  Rather, consider it your responsibility as a trader to keep your capital working for you in the best manner possible.

That means putting it at risk when there’s a good possibility of profiting, and it means protecting it from risk when that potential isn’t present.

The longer we’re in a position as traders, the more we become exposed to company-specific, unplanned news…a surprise, if you will.  Leaving a position at risk indefinitely raises the likelihood that news will eventually push the trade one way or the other.  The problem with that is that a trade initiated from a technical standpoint should not evolve into a trade which is hopeful for news to make it move.  We want real selling or buying to be the deciding factor, and when that turns stagnant then the basis for the trade is negated.

So as you work through your position sheets this week, consider whether some of those stocks are merely resting or if instead they’ve completely lost momentum and are now simply range-bound.

Do your best to determine if a little more patience is needed, or if instead a little less patience is warranted.  Time is money, especially for a trader.  It might be time to put that trade on the clock and set a deadline.  A far better trade just might be waiting for you.

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Trackbacks: 1  |  Trackback URL

  1. From Tweets that mention Implementing the Time Stop | -- on Sep 19, 2009

Sorry, comments for this entry are closed at this time.