Swing Trading 101: 6 Lessons From a Losing Trade

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The best lessons come from losing trades. In this lesson, I look at a losing trade and what lessons can be gained from this trade. As a famous trader once said, “The only thing that stopped me from making even more money trading was my winning trades.” Think about that. While we all hate losing trades, the best lessons come from them.

Stock Trading 101

1. Successful stock trading has nothing to do with being able to predict the price a market will hit in the future. All we try and do is predict which direction a stock will move from where we entered the trade.

2. Anyone making price predictions such as the S&P 500 will be at level xxxx by year end or gold will be at xxxx by year end, will ultimately be proven wrong. Stock market trading 101: No one can predict the future. Even the best predictions that turned out to be true were nothing more than the result of random luck. If you follow those people who made a correct prediction, you will always discover that they are mostly wrong about predictions after that correct one. No one is smarter than you or able to predict the future. There is no such thing as a crystal ball, a prophet, a seer, or a time machine. People can’t even predict what they will be eating 3 weeks from now for dinner or what the weather will be like 2 weeks from now.


Consider Jim Cramer who recommended that everyone invest their 401k and pension funds in firms like AIG and Bear Stearns just months before these companies went bankrupt. Cramer made predictions about what price these two stocks would be trading at in a year rather than respecting the current downtrend in both of these stocks.


Peter Schiff gained a huge following as being one of many who predicted the housing bubble would pop and end badly. All through 2009 and 2010, Peter Schiff went on Fox News and said gold was going to $5,000 and higher, and the U.S. dollar was going to zero. “In a best case scenario”, said Peter Schiff, “the U.S. dollar is going to 50.” Rather than just trading the trend in gold and the dollar in the present, Peter Schiff fell into the trap of predicting price targets in both markets. He was spectacularly wrong on both predictions. The dollar never closed below 71, and gold never closed above $1,924.


In 1999, James Glassman said that the market was not in a bubble and said, “We’re going to reach a point where stocks are correctly priced, and we think that’s 36,000… It’s not a bubble. Far from it. The stock market is undervalued.” Glassman even went as far to publish a book entitled Dow 36,000 where he said that the Dow would triple in a few years. The Dow was near 11,000 in 1999 when Glassman made his prediction. Within “a few years” (3 years later) the Dow had dropped to 7197. In 2009, some 10 years after Glassman’s prediction, the Dow hit a low of 6469.

The point of this lesson is not to bash Jim Cramer, Peter Schiff, James Glassman or the dozens of other wrong predictions made from other popular stock gurus. Instead, the point is to notice the common theme that losing money often comes from hard price target predictions. Most new traders think that in order to make money at trading, one has to be able to predict the future price of a market. That is not true. To make money at trading, one only needs a very small trend to occur in the present. Trading an oversold pattern, continuation pattern, or breakout pattern has little to do with predicting what the S&P 500 is going to hit by the end of the year. Your focus should be on trading the trend in the present. If someone asks you what you think the S&P 500 is going to be trading at in 6 months, counter the question by asking them what they think the weather and temperature in Dallas Texas is going to be in 6 months.

3. Always set a “profit stop”. This follows the principle, “Never let a winning trade become a losing trade.” A profit stop says if the stock begins pulling back, I’m not going to let it go below what I originally bought it at. Several professional hedge fund managers never market order a sell. Instead, they prefer to always be stopped out of a trade. What they do is tighten the profit stop as the market rises.


For example, in the chart above of the S&P 500, let’s say you enter on the breakout pattern. You start off the trade with a 5% stop loss. As the stock trends higher, you slowly tighten your stop loss making it 4%, then 3%, and so on. When your stop loss becomes “in the money”, meaning that no matter if the market reverses, you will still break even or make money on the trade, your stop loss morphs into a profit loss. As the market continues to trend higher, you continue to tighten your profit loss. In the example above, we have tightened the profit loss to 2% meaning that as soon as the S&P 500 pulls back 2%, we will sell and exit the trade. If the market keeps going higher, we will stay with the trade. Eventually the profit loss will be so tight that we will stop out of the trade from just the smallest move down on the S&P 500. This type of profit loss strategy lets you ride the trend and partake in the upside, while protecting yourself on the downside. It is truly following the mantra, “Let your winners run and cut your losers short.”

4. Sign up to ETrade Pro so that you can easily trade in After Hours. If a bad news report or SEC filing comes after the market closes, you can exit the trade in After Hours quickly. Keep in mind though that your fill price is probably going to be horrible. Stock picking 101: never buy or sell stocks in after market hours. However, know how to execute an after market hours trade in case horrible news comes out about a stock you are in and you have to act fast.

5. When buying oversold patterns always stay away from bankruptcy filings and share offerings. Swing trading 101: never turn a swing trade into a long term investment because the stock drops on the news of a stock offering. Be a disciplined trader and stick with your original profit thesis. If that thesis is violated, get out. Don’t rationalize and change your profit thesis because you don’t want to book a loss. If you are swing trading a stock and news of a stock offering hits, it’s almost always a good idea to get out of the stock as quickly as you can.

6. Adding to a losing position is a bad idea. Never add to a losing position. If your stop loss is hit, get out and walk away from the trade. Don’t take a little losing trade and blow it up and turn it into your own personal Vietnam.

Frequently Asked Questions about Swing Trading 101: 6 Lessons From a Losing Trade

When to exit a losing trade.

You should exit a losing trade as quickly as possible. To do this, you need to use a stop loss (aka a sell stop) just below your entry. Top traders seldom enter a trade unless they can pin-point a clearly definable stop loss.

REXR chart showing horizontal support level

A clearly definable stop is usually set just below a support level where a stock has repeatedly bounced off of in the past.

Why do I keep losing trades?

You keep losing trades because you keep trading. The first thing that you need to do to stop your losing streak is to stop trading. You can’t lose if you are not trading.

Institutional traders have the floor manager who will come and tap them on the shoulder when they have too many losing trades. When you get the tap, you have to close down your trading station and go home for the day.

When you trade at home for a living, you don’t have someone to tap you on the shoulder.

After you stop trading, go back to your daily watch list and completely delete it. Now go back to your master watch list and pick the best looking stocks for the next trading day and add those to your daily watch list. On the next trading day, don’t buy anything but see if you were right about the stocks you added to your daily watch list. If you were right about the direction on 70% or more of the stocks you added to your daily watch list, you are ready to get back to trading the next trading day.

If the reason for your losing streak came from a downward move on the S&P 500 that pulled down almost all stocks for several days, then stay out of the market. Try to get out of the way of the market and let it go lower. Look for the S&P 500 to get down to a nice oversold level before you trade again and only go for stocks that are oversold, not breakouts. Wait for the S&P 500 to do a candle over candle reversal off of a significant support level before entering the market again.

Some traders do not like to stop trading and instead reduce their position size during a losing streak.

You can make money at trading, even if you have a high percentage of losing trades, by keeping your losses small while letting your winners run.

CMC Markets PLC CMC Markets PLC posted the excellent video below called Trading strategy – Stop loss strategies explained.

What is after hours stock trading?

After hours trading is stock trading that takes place outside the regular trading hours.

The NYSE (New York Stock Exchange) and the Nasdaq have regular trading hours from 9:30 AM to 4:00 PM EST.

After hours trading is from 4:00 PM to 8:00 PM EST.

After hours trading is very different from regular hours trading. All orders must be placed as a limit order. There is lower volume and thus wider spreads between bid and ask prices.

Zecco posted a good video below on after hours trading. They refer to the after hours market as the “Post-Market”.

What is a secondary share offering?

A secondary share offering or (common share offering) is when a company issues new shares to raise money after its initial public offering (IPO).

Companies usually do a secondary share offering to raise money for growth.

Share offerings are often highly destructive to the share structure of small cap and micro cap companies. Most of the time, a stock will immediately plunge on the news of a share offering. Investors want a company to pay its bills via increased sales, not increased outstanding shares.

A common share offering increases the outstanding shares in a stock effectively diluting or lowering the percentage of shares in the company that all investors hold.

It is usually better to sell and exit out of a stock as quickly as possible if news of a common share offering is announced and then watch what the price of the stock does before deciding if you want to get back into the stock.

Khan Academy posted the excellent video below called Stock Dilution.

Stockhaven posted a video of how stock dilution impacts the level II quotes in real-time. When a company creates more shares thus increasing the shares outstanding, it then needs to sell those common shares on the open market to raise money. This imbalance of share selling can be seen on the level II quotes when market makers are only on the ask (they only want to sell shares), but not on the bid (they are not wanting to buy any shares to replenish their inventory).

What happens to a stock when a company files Chapter 11 bankruptcy?

A Chapter 11 bankruptcy is when a company goes into reorganization under the supervision of a court appointed regulator.

Creditors are always paid first in the event of a bankruptcy. Bondholders come next because a company’s debt is expressed in the form of bonds.

There is no law that prohibits a company from trading as it goes through a Chapter 11 bankruptcy. In a Chapter 11 bankruptcy, a company’s stock can continue to trade; however, usually companies that declare bankruptcy are unable to meet the requirements of the NYSE or the NASDAQ. They may still be able to trade over the OTCC or Pink Sheets.

It is best to sell your stock as quickly as possible on the news of a bankruptcy filing.

Khan Academy posted the excellent video below called Chapter 11: Bankruptcy Restructuring.

What happens to a stock when a company files Chapter 7 bankruptcy?

When a company declares a Chapter 7 bankruptcy, you will lose your entire investment.

When the company is liquidated, creditors get paid first, then bond holders, and finally shareholders. Shareholders usually get nothing.

You can write off the loss on your taxes the same as you would any other loss in the stock market except that you use the last day of the year for the sold date, and you write “worthless” for your sale price. The loss can be used to offset your capital gains for the year but only $3,000 per year. You can carry anything greater than a $3,000 loss over to the next year.

Khan Academy posted the excellent video below called Chapter 7:Bankruptcy Liquidation.

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