A Realistic Look at Stop‐Loss

Stop-Loss Should Be Automatic

No day trader likes to place a stop-loss. But all pro-traders understand that it's a normal part of the day trading process. As I mentioned in the section on updates and changes, my current system redefines stop-loss and how or when you should execute one.

(For those who have been under my mentorship, I want to remind you again that I no longer use nominal value stop-loss exits. Now that I use swing trades as major pivot points, it makes absolutely no sense to stop-loss when I'm $XXX in the red. Instead I capture even stronger levels when accumulating a position. This I clarify later.)

Here I'll show some important uses of stop-loss in some very definable situations. There is never any guesswork with my system. I refer to this as strategy stop-loss.

How to Properly Strategize Stop-Loss without Hesitation

• Always have a predetermined exit strategy. Never hold an intra-day position past 4:00 p.m. at market close. Never hold overnight.
• If you accumulate more of a swing position intra-day and are using margin/leverage, then you must stop-loss the amount of shares on margin. (Later I introduce to you what I call pivot trading. This strategy allows you the opportunity to recapture the amount lost today on the very next market opening.)
• Never hold any position into an earnings release (typically in aftermarket trading). Exit your entire position by 4:00 p.m. on the day of earnings release. This is especially true for swing positions that you can hold overnight—just never into earnings release. It's way too risky to hold into a release, because once Wall Street starts trading, the stocks we trade can easily fluctuate $30+ in either direction. That's a $3,000 loss, even with 100 shares, if you get the call wrong.
• Never allow standard stock related news to dictate your entry/exit process, except when your stock is literally hitting the “breaking news” wire on the MSNBC channel. Combined with other factors, such as the volume on the stock and how many shares and which tiers you're in, only then should you think about just exiting when in the red. If you're in the green, that's great, but if not, that's a classic time to stop-loss.

The above almost never happens with my stocks. Most news is already factored into the price, so breaking news has to be truly in the moment and devastating or otherwise hugely impacting for me to stray from my plan.

A great example of this is what happened with TSLA, a stock of mine in 2014. A battery caught fire in one of Tesla's new cars. When that news broke, I immediately exited my positions on TSLA. A few days later I simply recaptured my loss by getting back in at lower levels and riding the price back up.

All this may sound easy, but believe me it is not. I only got back in because it was hitting the lower levels that I was planning for, regardless, which illustrates my point: you always have to know your price levels.

Other examples of strategy stop-loss would be a CEO giving notice of stepping down or when mergers are announced. Again, these things almost never happen with our $100+ stocks, so stop-loss caused by the news is very uncommon with my system.

The most prevalent reason for strategy stop-loss is actually the easiest to follow: if you know you made a mistake by entering at the wrong price level, then stop-loss. It's that simple.

After you learn the framework of my system, you'll have a much clearer understanding as to why I haven't stop-lossed when I've been $2, $5, or even $10 in the red. It wouldn't have made any sense. If I had, then many of my past profitable trades would have been losers to date.

My system is countertrend trading. This means that if I'm deeply in the red, the current price is that much more likely to reverse back into the green.

This is the critical reason why you've got to know all of your price levels—at any given time of the day—no guesswork.