Stock Exchange: Do You Know When To Fold Your Trades?

Review:

Our previous Stock Exchange asked if the current momentum trend is really your friend, and then pointed out the benefits of blending multiple trading approaches. If you missed it, a glance at your news feed will show that the key points remain relevant.

This Week: Do You Know When To Fold Your Trades?

One of the worst mistakes you can make as a trader is to be stubborn. For example, a common mistake among new traders is refusing to cut your losses when the market is moving significantly against you. Convincing yourself that the market will eventually move in your direction if you just hold on to your position a little longer can often lead to disaster. According to professional trader, Nial Fuller, “one of the most challenging decisions that [traders] are faced with on a day to day basis is…knowing when to hold on to a trade and when to close it.” In his recent article “Know When to Hold ‘em…” Nial explains how to manage your trades in various market conditions. His advice includes using stop loses, and also trailing those stop loses in a rising market.

Another interesting read appeared in the Wall Street Journal this week regarding the large amount of short interest (i.e. people betting against) on RH (RH) (formerly Restoration Hardware) this year. Of course RH is a stock we’ve written about often in this weekly Stock Exchange series (for example, here, here and here) and it’s also a trade that our trading models have had a lot of success with by being long. The Wall Street Journal article suggests as much as $1 billion dollars may have recently been lost by short sellers betting against this stock (which is a lot considering the market cap of RH is still less than $2 billion even after the shares have risen more than 195% this year). Despite the big gains (which have been fueled in part by massive share buybacks), plenty of short sellers remain unconvinced considering about 35% of the company’s shares are still currently sold short. Several of our models are on the other side of that trade, however our models have stop loss orders in place to prevent us from giving back our big gains.