Post-mortem: Was it wrong to get out at exact low?

[Cutten]

Quote from turkeyneck:

Bought Shittygroup at $35 (70% equity back then) last Nov and rode it down to $13 and change. LEH and other banks were blowing up left and right on 9/15. I thought C would go to single digit. I feared blowing up my account and sold C at the exact low at a big loss. A margin call at the background didn't help either. A day later it shot up to $20 with the bailout plan and I felt like a total moron. Was it wrong to get out and preserve capital in this scenario?

No. You were right to sell. Your mistakes were:

i) trading too large
ii) having on a position of any size when you did not know what was going on
iii) not selling earlier when i) and ii) became obvious.

Why were you right to sell? Because you had a large position, and no clue what was going to happen. I.e. it was, for you, a total coin flip gamble. If you think tossing a coin on 50% of your account equity is a good idea, then you need your head examined. Therefore it was right to sell all, or at least the vast majority, of your holding. Now if you had sold most but kept say 5-10%, that would be more defensible, but *only* if you had a valid reason. Hoping and praying for a bounce is not one.

The simple way to answer your question is this - let's say a stock has gone down 70% in the last year. You have no idea if it's going to fall further or rally. Would you wager 50% of your account equity on this trade? No you wouldn't. So how is it any different if you already happen to be in the stock?

 

[Cutten]

Quote from AAAintheBeltway:

I have been at this a while, and I will promise you that if you try to "ride it out", you will inevitably end up getting out at or very close to the low of the move.

Great explanation! This must be one of the truest statements ever made on ET. If everyone just memorized this and lived by it, a lot of $$$ and heartache would be saved.

 

[Port1385]

Conventional wisdom is to set a certain threshold for when you will exit no matter what. Most people set that threshold between 8-10% or upon a certain place on the chart.

 

[Adobian]

Should we have am average down mentality?

Every book talks against Averaging Down. I sometimes do like the big boys do, aim for a good stock, then buy in parts on the way down, watching the indices at the same time.

 

[tradetesticles]

Quote from Adobian:

Should we have am average down mentality?

Every book talks against Averaging Down. I sometimes do like the big boys do, aim for a good stock, then buy in parts on the way down, watching the indices at the same time.

There are a few ways this is done. If you are a long term holder (my condolences if you are) then dollar cost averaging works if you are lucky and space out your buys over a period of time that's long enough to cover the steepest part of the bear market. Then you have to sit through the return of the bull market and know when to take profit. Once again..the caveat is if you're _lucky_ with it.

I never average down because it usually means I mistimed my entry somehow. Rather than increase the weight of risk in my position I sit or reduce according to my stop loss plan.

Averaging up in a strong trend and during pullbacks is a far safer strategy. But it's counter intuitive to typical gambler/trader mentality which is to "double down" to make it all back when you're on a losing streak.

This is why most traders fail. There's basic common sense/psychology at play in most trades that people always fail to grasp.