One of the main reasons I pick targets for exits, and exit at least a good portion of trades into strength, is to avoid the stop loss trap. Why not just let it run and walk up a stop? Well, I do for some, but the stop loss trap is hard for me psychologically, and I know I’m not alone.
What is the stop loss trap? Picture this scenario. You’re in a swing trade, and you tell yourself that you want to stay in it as long as it is in an uptrend. The time comes when the 4 hour loses the uptrend, but the 15 min is oversold. You don’t want to exit when the 15 min could then bounce, so you stay in the trade a little longer. Then the 15 min does or doesn’t bounce, you haven’t exited and all of a sudden, the daily uptrend is lost. But now the hourly is oversold, and you’re still looking for a weekly higher low, so maybe you’ll add to the trade instead of stopping out. Or maybe you’ll wait through weekly consolidation because the weekly is just looking for a higher low, and you don’t want to sell right at the bottom of the weekly higher low. Well, that low hasn’t yet come, and despite hourly oversold the stock has now come down 10% more, you’re still in the trade, the daily is oversold and instead of stopping out, you are now looking to add even more to a losing position hoping to catch a bounce.
This is the stop loss trap. So what can we do?
The first thing you can do is have your stop set as an order. This can be as a manual stop you walk up, or a trailing stop on your broker - but if it is set in advance as the chart extends up, you will be less likely to go in and change it than if you have to manually stop out.
Secondly, remember that RSI is a momentum indicator. If we are now in a downtrend, then a 5 minute or 15 minute RSI is an indicator that indicates momentum is now in the favor of the downtrend on the larger time frame, and we can continue to drop without a bounce. If you want to play the bounce, then I would still stop out of the trade, and then treat the bounce as a separate day trade.
Third, have your clear exit plan marked before. If X is lost I will stop out. No matter what. If it turns into a weekly bull flag, you re-enter. If it turns against you, you are out.
It’s often we remember the instances where we stop out and then a stock begins its run without you. Dan has mentioned that this is probably a result of our own biases - where we only pay attention to the times we’ve missed out, rather than the times it has saved us. Just as early as this week I have been rewarded for stopping out despite oversold conditions, but I also remember one time in 2017 during the marijuana sector run where CGC lost the 4 hour or daily uptrend, and we were deeply 5 minutes oversold when the break happened. I forced a stop out despite everything screaming we must bounce we must! Less than an hour late we were a further 10% down, able to play a bounce for a day trade, and even re-enter our position cheaper if we so chose. Dan sold his BTC I remember in the 6 thousand range when the weekly bear flag confirmed, bought it all back under 4 a little while later. It may seem silly now that it’s trading at 40 thousand, but many altcoins did not recover. Sometimes we will miss out, sometimes we will be able to re-enter. But if you’re asking yourself what if what if what if - then you are in the trap, and not in control.