Making Money with a Loser
Trade managment cannot be overemphasized. It is the key to preventing big losses, and many times it can help you salvage a small win from an otherwise losing stock.
CHUY (Chuy's Restaurant) was listed as a ProSelect stock for purchase, and it broke out June 11, 2013. The trigger price was $35.65. The first 10 days of price action was storng, and the stock hit its 1st target of $40.25 where profit was banked on 1/2 of the position. The other half of the position was left to go higher. The stock came within $0.19 cents of it's second target of $44.50. But the stock then had a big sell day on high volume which was a warning. In retrospect, that would have been a good time to cash out of the remaining shares since the stock was close to its second target anyway. Instead, the stop loss order was raised to $3 above the entry price to prevent this winner from turning into a loser. CHUY got stopped out 5 days later with a gain on the last half of the poistion. After that, the stock spent another 8 days falling and is currently about $3 below the initial entry price.
Had the management sytle been to buy and hold with a 5% stop loss, the loss on this position would have been 5%. Instead, the gain was over +9%!
The stock was a winner becuase of two actions:
1. Half profits were taken on the way UP, locking in about 10% gains on half of the stock shares.
2. When the stock foundered near the second target, the stop loss was raised "above" the purchase price, so that if the stock continued to decline, the stock would be stopped out with a profit and not a loss.
The position had an overall gain of 9.7% in one month, even though the current price is below where the stock was purchased.