In a Market Crash, This “Strategy” Will Break You
Dear Penny Stock Millionaire,
It never ceases to amaze me how many traders fail to trade their plan. Instead, they rely on hold and hope as a strategy.
Using a trading plan is one of the most basic concepts every trader should learn. But too often, traders skip this all-important step. Maybe they join a program, get alerts, and then start to trade, but without anyidea what to do when things go wrong…
Let’s just say it doesn’t always end well.
Any Moron Can Hold and Hope
Hold and hope is not a strategy. It’s your stubborn ego standing directly in your path and slapping you right in the face. Over and over. Because the longer you hold and hope, the more likely it will bring a quick end to your penny stock trading career.
Sorry to be so blunt. But I have to get this off my chest. If you overstay your welcome in a bad trade, you’re pulling a hold and hope. And it’s one of the most reckless and stupid things you could ever do.
Any moron can hold and hope. One of the most important things I can do as a teacher is to help you to stay in the game. Forget about getting rich for a moment. I know if you’re reading this you want to get rich. Believe me, I want you to get rich.
But if you blow up your account because you fail to follow a plan and then fail to abide by my #1 rule: Cut losses quickly… you’re basically screwed in this game. You will lose. I don’t want that. Not for me, you, or anyone.
What Happens When You Hold and Hope
When you hold and hope — rather than trade your plan — you risk ejecting yourself from the game. It’s like a baseball player attacking the umpire. He lets his rage get the best of him, and that’s that. Out of the game. The difference is, the baseball player can come back and play in the next game.
If you blow up your account because of your ego… that might be it.
A few things before I go into detail about trading your plan vs. hold and hope…
Yes, there are swing traders who hold positions for days and weeks. That’s cool. They do what they do, and I do what I do. Remember, the best swing traders still use risk management. So while it might seem like I’m advising you against their strategies, this is different.
Also, you’ve gotta remember that losses are part of the game. That’s why trading your plan is so important. A single trade won’t make you rich. But a single loss could destroy you…
The Danger of Hold and Hope: Long Side
If you’re trading a long setup, you could lose a high percentage of the money you risk.
It’s not likely you’ll lose all the money you risk. Not in a single trade. But you could lose it all in certain circumstances. For example, if a stock gets halted, tanks, and gets halted again. There are cases where the stock never trades again. Or maybe it trades so low it doesn’t matter.
Then there’s “the crow”. A crow gradually sinks lower and lower in price.
There’s also the risk of dilutive financing, reverse splits, bad news, reverse mergers…
…the list goes on.
In other words, there’s a lot beyond your control. For example, the 99.94% drop on XGTI (now VISL) I mentioned in this post about warrants. Hold and hope is not a strategy. It’s dangerous.
The Danger of Hold and Hope: Short Side
Right now, hold and hope is way more dangerous for shorts than longs. Especially for anyone trading with a small account. Why?
Check it out…
If you short sell, you have the potential to lose more than you risk on any trade. Remember, short-selling means your thesis is that the stock price will drop. You have to borrow shares to sell and then buy shares to cover when you’re ready to exit the position.
This is one big, nasty problem right now. There are so many shorts playing the game with no patience that we’re seeing short squeezes. (I love that it’s happening — it can create tons of opportunity.)
What happens in a short squeeze? Shorts trying to get out of their position buy shares. When they buy on the ask or slightly higher to ensure their order gets filled … it can be a thing of terrible beauty.
As more and more shorts try to get out, the price squeezes higher and higher. Some recent short squeezes have spiked 100% … 200% … even up to 300%. And these things can move fast. The problem with short selling, especially right now, is that you can’t always cut losses quickly even if that’s your plan.
You can get destroyed almost immediately. I keep hearing about big-time short-sellers getting crushed. Blown up accounts all over the place. I get messages and emails with short squeeze horror stories.
Why You Should Never Hold and Hope
Bottom line: you need to stay in the game. To stay in the game, you have to protect yourself. You have to have something left for the next trade. Other trades will come. If you miss one or you’re wrong, so be it. Move on to the next.
Haters come at me all the time saying, “Tim, you trade too conservatively. You should learn some new patterns and trade like the big boys…”
Or, “Tim, if you’d just held for another 30 minutes that small loss or small win would have been a big win.”
After two decades of trading, I’ve learned a few things about myself and the markets.
So here it is…
- I love profits more than I love being right. (Sometimes being right is painful because I have to watch as newbies blow up their accounts.)
- I’d rather protect my trading capital for the next trade than stroke my ego in the one I’m in.
- Learning the right lessons from small losses is better than learning the wrong lessons from big wins.
Why You Need to Enter Every Trade With a Plan
If you have a plan, it can help reduce trading stress. Especially if you stick to the plan.
Also, if you trade scared, trading isn’t scary. At the very least, it can be less scary because you know what you’ll do when the stock moves. And that goes for both wins and losses. If you plan for a 10%–20% gain and find yourself up 12% with resistance, guess what? You’ve met your goals and you can get out.
Editor, Penny Stock Millionaires