Setting Price Target and Stop Loss

[quadcam 10]

Hey all,

 

I'm new to the forums and recently started swing trading the stock market. A little before my question, I've been messing with investing on and off for a few years. I started out with a very low funded buy and hold account with no real clue as to what I was doing. Up to that point the only thing I had done was read the motley fool investing workbook.

 

So I bought a few low priced stocks made a few bucks profit on some but mostly lost more than I made. fast forward a few years and finally decided to take advantage of the 401k from my employer, picked a few risky funds and had a decent return. One day my employer offers a new option "self directed brokerage account" I'm all over that. so i dump my mutual funds and lose $1300 right off the bat, then I start buying stocks....again no clue about money management or really how to pick a stock. "hey i have $5000 so i'll just buy 3500 worth of this one and 1500 of that" :crap: ignorance is bliss i guess

 

I also had no clue as the the difference between investing and trading, AFAIK but a stock hold till the price eventually goes up and sell. So one day I'm reading a tech blog and see a blurb about a small tech company who developed a new, never before seen memory module. I find the stock and purchase a few shares, the next day the share price triples and I sell for a nice little profit. Wow what a good feeling, so I wait a day for the price to settle and I sink about 50% of my total account equity into buying more shares. I keep accumulating as the price keeps going lower and lower :doh: 6 months later i have about 1500 shares and "it's going to pop any day now....any day" as i watch the price drag down day after day but keep telling myself "any day now, any day"

 

meanwhile i start actually trying to learn where i'm going wrong and paying attention to an investor with a video blog who has been there done that and learned the hard way. I learned a lot about cutting losses, the 2% rule, risk/reward, reading charts etc. I finally bit the bullet and dumped that tech stock for a $2000 (50% of my total account balance) loss.

 

fast forward to today and I have a much better understanding of the markets but i'm still struggling as to where to set my price target and take profits. I deal mostly with penny stocks (under $5/share) and most of those are in either the tech or biotech sectors which are both pretty volatile and can run up or take a nosedive simply based on someones blog entry.

 

I shoot for a 1:2 risk/reward ratio but that can be really difficult with these stocks. I'll give you an example purchased 150 shares of MCZ for $1.15 share, the other day they release record earnings and shares jump to a high of $1.53 before closing at $1.45 now assuming i had seen the reverse coming and put in a sell order for $1.50 that would have netted me a whopping $35 after commissions. However in this case I decided not to sell, they announced 98% growth and record profit and have a recent deal with microsoft and based on potential I added another 150 shares at the close for a total of 300 for an average price of $1.31.

 

I really don't know if i should have just sold at the top and took a small profit or hold out for my 1:2 target of 2.30 and if it hits the target price either sell of place a stop in the case it keeps running.

 

so am i setting my target correctly? if i pay $1.15 share i should be setting a target of $2.30 or better and in that case where would you place the stop loss. i've been doing a stop of 20% below my share price so in this case my stop loss would be $0.92

[MightyMouse 12]

  quadcam said:

Hey all,

 

I'm new to the forums and recently started swing trading the stock market. A little before my question, I've been messing with investing on and off for a few years. I started out with a very low funded buy and hold account with no real clue as to what I was doing. Up to that point the only thing I had done was read the motley fool investing workbook.

 

So I bought a few low priced stocks made a few bucks profit on some but mostly lost more than I made. fast forward a few years and finally decided to take advantage of the 401k from my employer, picked a few risky funds and had a decent return. One day my employer offers a new option "self directed brokerage account" I'm all over that. so i dump my mutual funds and lose $1300 right off the bat, then I start buying stocks....again no clue about money management or really how to pick a stock. "hey i have $5000 so i'll just buy 3500 worth of this one and 1500 of that" :crap: ignorance is bliss i guess

 

I also had no clue as the the difference between investing and trading, AFAIK but a stock hold till the price eventually goes up and sell. So one day I'm reading a tech blog and see a blurb about a small tech company who developed a new, never before seen memory module. I find the stock and purchase a few shares, the next day the share price triples and I sell for a nice little profit. Wow what a good feeling, so I wait a day for the price to settle and I sink about 50% of my total account equity into buying more shares. I keep accumulating as the price keeps going lower and lower :doh: 6 months later i have about 1500 shares and "it's going to pop any day now....any day" as i watch the price drag down day after day but keep telling myself "any day now, any day"

 

meanwhile i start actually trying to learn where i'm going wrong and paying attention to an investor with a video blog who has been there done that and learned the hard way. I learned a lot about cutting losses, the 2% rule, risk/reward, reading charts etc. I finally bit the bullet and dumped that tech stock for a $2000 (50% of my total account balance) loss.

 

fast forward to today and I have a much better understanding of the markets but i'm still struggling as to where to set my price target and take profits. I deal mostly with penny stocks (under $5/share) and most of those are in either the tech or biotech sectors which are both pretty volatile and can run up or take a nosedive simply based on someones blog entry.

 

I shoot for a 1:2 risk/reward ratio but that can be really difficult with these stocks. I'll give you an example purchased 150 shares of MCZ for $1.15 share, the other day they release record earnings and shares jump to a high of $1.53 before closing at $1.45 now assuming i had seen the reverse coming and put in a sell order for $1.50 that would have netted me a whopping $35 after commissions. However in this case I decided not to sell, they announced 98% growth and record profit and have a recent deal with microsoft and based on potential I added another 150 shares at the close for a total of 300 for an average price of $1.31.

 

I really don't know if i should have just sold at the top and took a small profit or hold out for my 1:2 target of 2.30 and if it hits the target price either sell of place a stop in the case it keeps running.

 

so am i setting my target correctly? if i pay $1.15 share i should be setting a target of $2.30 or better and in that case where would you place the stop loss. i've been doing a stop of 20% below my share price so in this case my stop loss would be $0.92

 

Quadcam,

 

If you are buying stocks that are in the $1-$2 price range, the stocks you are buying are probably in very long term down trends, since most of these stocks started out priced much higher. Its not an easy game to play especially for someone who has the experience that you do. The best bet for trading these low priced stocks is to do something like buy a few hundred different ones and expect most of them to fade to oblivion and a handful will recover and have stellar gains. Any hard stop you set will get hit.

 

These stocks have very little "serious" interest in them. Most institutions won't have them on their radar until the stocks are priced over X dollars. X can be 10, 15, 25, etc. You are therefore trading against hedge funds and other market makers who make a market for these low priced stocks. What that really means is that they specialize in extracting the equity of people who are attracted to low priced stocks or they would not bother with these low priced issues.

 

So setting a stop and a target guarantees you to lose money with these issues. The target tremendously limits your ability to make money in this instance. The only way for your $1.15 stock to get to $20 is to go through $2.3, $5, etc. It takes serious patience to let that happen too. And, the stop you set, which they can see, allows them to liquidate their short positions that they accumulate at higher prices. It is a very unfair game, because not everyone can short these stocks. Besides, most of these stocks are in long term down trends.

 

On the other hand, if you bought a stock like Coke, IBM, COP or some etf's you can be reasonably assured that they are not overly manipulated and you will make money over time if you are patient.

 

The hype with these lower priced stocks is that you can make a zillion times your money and be rich like the bald guy in the advertisement. However, look up information on why you shouldn't buy these stocks to counterbalance the reasons you have for wanting to buy these stocks and be rational.

 

If you are trading to have fun and not necessarily to make money, then have a good time.

 

MM

[quadcam 10]

MM,

 

thanks for the advice, I totally understand the risk and volatility of low priced stocks and I do as much TA and research on them as I can before I commit to purchase. I'm not expecting any of them to hit $20 or even $10 for that matter, mainly I'm just looking to double my investment.

 

some of them are as you said, long term downtrends and sometimes I screen for just that, beaten down companies who may have some new product with potential. most, if not all of these are short term holds not long term investments as KO, IBM or one of the big blues that pay out dividends would be.

 

some of my recent purchases are doing well tech companies with record earnings, restaurants making a big turnaround, biotechs with recent fda approvals.

 

but due to the volatility I'm just not sure if it's better to take profits during a run up or set a target of 2x-3x the original price and put a trailing stop on them just below support.

 

thanks

[SIUYA 11]

I assume you are in the US.....so just as a side note. Not every other country has the attitude bigger is better in terms of share prices. For some reason Australia is often the opposite, and there were/are some big companies with small denominated share prices, but big market capitalisation. Often stocks here would do share splits in order to reduce the price of the share....eg; 10 for 1 to push the price from $30 per share to $3 per share......its often the other way in the US.

So the stupid idea that a stock below $5 is not worth looking at should not be applied. A stock with crappy market capitalisation, small shareholdings, a downtrend and poor fundamentals should be avoided.

Otherwise MM has good advice, and it seems that you have discovered why its often stated that losers average losers.

As an exercise in thought.....rather than setting a target and stop loss off an entry, why not try and work out where you would place a stop loss and target first, and then see if it makes sense now to buy it immediately or wait until the price is more favourable.

[MightyMouse 12]

  SIUYA said:

I assume you are in the US.....so just as a side note. Not every other country has the attitude bigger is better in terms of share prices. For some reason Australia is often the opposite, and there were/are some big companies with small denominated share prices, but big market capitalisation. Often stocks here would do share splits in order to reduce the price of the share....eg; 10 for 1 to push the price from $30 per share to $3 per share......its often the other way in the US.

So the stupid idea that a stock below $5 is not worth looking at should not be applied. A stock with crappy market capitalisation, small shareholdings, a downtrend and poor fundamentals should be avoided.

Otherwise MM has good advice, and it seems that you have discovered why its often stated that losers average losers.

As an exercise in thought.....rather than setting a target and stop loss off an entry, why not try and work out where you would place a stop loss and target first, and then see if it makes sense now to buy it immediately or wait until the price is more favourable.

 

Yes, in the US, they tend to be the beaten down stocks and was specifically referring to them. A poorly communicated idea on my part. I have to remember that the center of the universe is not the USA.

[jackhammer 10]

As the saying goes" You get what you pay for" also rings true when buying stocks. Any stock under $5 is very speculative and has very little interest from the big players. Look at stocks over the $10 range and buy fewer shares. You are playing with fire on these penny stocks and 9 out of 10 times you will get burned unless you have some serious research behind your buys. Consider an index fund until you improve your trading style. This may take a few years of hard work but you will still have funds to trade when you have perfected your craft. I wish you all the luck and success in your investing

[Tradewinds 12]

I suggest that you use a special kind of trailing stop for your profit target. When the price spikes up a certain percent, take profit at a lower price. You need a broker that will allow a trailing stop to be triggered at one price, and entered at another price. For example, price spikes 3% up, so your trigger condition is hit, but you want to make sure your order gets filled, so enter the sell order at a lower price. It's a more complex order configuration, and may take some learning to figure out how to do it, but that's what I would do for the profit target. I would never set a hard profit target. Enter a trailing stop for the target that triggers at one price and sells at a different, lower price. If your broker does not offer that, look for a broker who does.

[TraderWill 11]

Hi quad, if you're using technical analysis on your charts then one approach you can use for targeting is to measure the most recent price move, wait for a retracement, and when the trend resumes (if it does), set your target for the same size move.

Good luck.

[Tradewinds 12]

I think it's worth mentioning that people are extremely bad at accepting, dealing with, and minimizing loss. This failure to deal well with loss is "hardwired" into your brain and mine. We must accept that we are extremely bad at dealing with loss. It is a weakness in our behavior.

 

I found this interesting:

http://traderslaboratory.com/forums/f37/monkey-economy-8316.html

[M. Contrarian 10]

I suggest you read a couple of excellent books:

 

- "Trade Your Way to Financial Freedom", by Van K. Tharp

- "Trading for a Living", by Dr. Alexander Elder

 

These two books will give you a good start on both the techincal and psychological aspects of trading.

 

Good luck!

M.C.

[Tradewinds 12]

As soon as I enter an order, I determine the price targets. But I will often adjust those targets. And I will absolutely exit every order on a "strength signal". When one of my indicators shows a strong move into profitability, I exit the order at a profit. If the original target was not hit before the strength signal, and I need to adjust the profit target down, then I will. My point here, is that I have two ways to set my exit targets.

 

1. Previous price levels
   
2. Indicator maxing out
   

 

If one of my indicators is hitting it's max limits, then I exit, regardless of what price is doing. If my indicator shows a max being hit, or unusual strength, and the price did nothing, then I don't wait to see if price is going to move. I just exit. If price is going to turn back in the original direction and move more, then chances are I will get another entry opportunity. If price reverses, then I avoided a sudden, steep loss.

 

I wanted to mention this because it is working very well for me, and I just started using this method.

 

I'm not saying what my indicators are, or what they are based on. I'm just providing a generic concept here. Hopefully the concept will give you some ideas.

[MadMarketScientist 11]

If you are a medium-term investor, be careful about actually submitting trailing stops to your broker ... market makers will drive prices down and pick off stops, its happened to me many times. Instead just track them yourself in a spreadsheet or find an online service to do it for you. And update it every day after market closes.

[dgdevans 10]

  Tradewinds said:

As soon as I enter an order, I determine the price targets. But I will often adjust those targets. And I will absolutely exit every order on a "strength signal". When one of my indicators shows a strong move into profitability, I exit the order at a profit. If the original target was not hit before the strength signal, and I need to adjust the profit target down, then I will. My point here, is that I have two ways to set my exit targets.

 

1. Previous price levels
   
2. Indicator maxing out
   

 

If one of my indicators is hitting it's max limits, then I exit, regardless of what price is doing. If my indicator shows a max being hit, or unusual strength, and the price did nothing, then I don't wait to see if price is going to move. I just exit. If price is going to turn back in the original direction and move more, then chances are I will get another entry opportunity. If price reverses, then I avoided a sudden, steep loss.

 

I wanted to mention this because it is working very well for me, and I just started using this method.

 

I'm not saying what my indicators are, or what they are based on. I'm just providing a generic concept here. Hopefully the concept will give you some ideas.

 

I think you are on the right track here. For me setting hard risk/reward ratios, targets and stops has proved to be an exercise in frustration. It means you need the price action to conform to your requirements (ie reach point A before point B) and markets are very reluctant to behave that way on a reliable basis (if they did trading would be easy!). I've found it more profitable to use indicator or price action based stops and exits (ie when a price patternoccurs or an indicator level is reached rather than when a price level is reached).

The size of individual profits and losses is much more unpredictable this way, so it requires well thought out risk managment, but I find it much easier to be consistently profitable.

[TimRacette 11]

Scaling out of your positions may be a technique you may want to adopt. This does two things...

1. It allows you to lock in some profit which in the case the stock does end up selling off, you will most likely end up break even at worst on the trade.

2. It allows for you to hold the remainder your position longer, and helps keeps your outlook objective.

 

It's really a win win. If you take some profit off the table and the stock continues to advance, you can still capitalize on the trade. If it you take some profit off the table and the stock comes back to stop you out, then you're loss is smaller.

 

Be slow to exit winners, quick to exit losers.

[eldermark 10]

I like what TimRacette has said about scaling back on winning positions: you'd want to take winnings enough to be safe and make some money, but leave some still on the table, in case it does continue to go in your favour.

 

Personally, I aim to make a percentage (say 4%) on a trade, take that, and any extra, I leave in the position.