On 09/11/20 the S&P 500 (SPX) broke below the bottom made on 09/08/20. The trade recommendation made on 09/09/20 was to buy funds that track the SPX on the open of SPX trading 9/10/20. The opening SPX level on 9/10/20 was 3412.60, stop loss for half of the trading position was SPX 3327.00 just below the low made on 09/08/20. Total decline at the stop loss point was 2.5% – trade loss on half of the position was 1.25%.
Trading is a business and losses are one of the expenses, you can’t eliminate the expenses you can reduce then.
The SPX continues to show signs of slowing downside momentum.
Please see the hourly SPX chart courtesy of Trading View.
Hourly Stochastic is in the oversold zone while the hourly RSI now has a double bullish divergence. Hourly MACD has a bullish divergence on the lines and histogram.
The second stop loss was on an SPX move below 3310.00 the low on 9/11/20 was 3310.50. Continue using a move below 3310.00 as a stop.
For investors, a common plan for buying funds is called cost averaging – simply buy the same dollar amount regardless if the fund has moved up or down in price. This averages out the overall investment price and the investor can endure even a multi-year bear market. This strategy will work for funds – not an individual stock which has the potential to go to zero. The amounts added on in the process are generally small in relation to the total position. A good example is additions to a retirement fund can be made ever pay period.
Should a trader add on to a position when there’s an unrealized loss? No, it has the potential to tremendously increasing trading losses. The percentage amounts added on by traders is usually much larger than an investor add on – typically the smallest add on is about 25% of the initial trade. Also, in many cases, traders will continue to add on to an adverse position. For example – if a long trade was entered at 110 then moves to 100 the trader adds to the position. Price moves to 90, again the trader adds to the position. Later price crashes to 60 and the trader has a gigantic unrealize loss.
Investing is passive and continuous. Trading is active and has a limited time span – you enter a trade then exit. Trading is a business and you want to reduce your expenses.
There is a method for traders to add on to an initial position called “Pyramid Trading” – adding to a successful position. This technique will be discussed in a future post.