Lessons in Losing Money

LOSING MONEY IN THE STOCK MARKET IS EASY that you may never know what hit you if you are not prepared. Marginal Stock Trader learned that lesson today when he sold 10 shares of Ayala Corporation stock at 265 pesos per share. This was triggered by his stop loss setup of 5% distance below the Minor Bottom of 270 pesos according to his previous post Online Stock Trading Plan Updated. Hence, the decision to exit came sooner than expected.

Surprise move
In the preceding post published yesterday, Marginal Stock Trader still maintained a long on Ayala Corporation stock. There was even a mention of time-stop loss anticipating a sideways market until end of July 2009 based on relevant indicators monitored. Therefore, it is a surprise that the stock managed to fall below Minor Bottom so soon.

Emotions and money
Indeed, emotions can never be detached from money. More so if it is about losing some of our savings diligently accumulated over a period of time we deemed significant. Here is where our stop loss rules should prevail to avert any further loss.

Stop loss rules
Based on Marginal Stock Trader's updated trading plan, our stop loss rules are as follows:

• 12.50 pesos below the entry price, or
• 5% below the identified Minor Bottom of 270 pesos.

Our Ayala Corporation shares has an average acquisition cost of 299 pesos based on our latest post Accumulating Shares of Ayala Corporation. Our nearest stop loss order should have been at 287.50 pesos. But we decided to go beyond that and use the next stop loss dictated by our Minor Bottom. Thus, we must exit anywhere within the conservative range of 257.50 to 270 pesos based on our updated trading plan.

Decision time
Today the price hit 265 pesos that served as the closing price for the day and this month of June 2009. This event activated our second stop loss exit rule.

We sold 10 shares out of 30 shares we have accumulated over the month. We are willing to trade only 20 shares according to one lesson we discussed in a post Marginal Stock Trader Learns By Experience. We said it is important to always have an inventory of 10 shares or 1 board lot of the stock for protection against huge losses.

This means we keep 10 shares forever and we trade the rest. But we decided to just trade half of what we are willing trade, which means selling only 10 shares for now.

New Lesson Learned
Today's trade led Marginal Stock Trader to formulate a new rule for beginning stock traders with minimum number of shares or board lots:

"Always keep a cash position equal to one board lot based on identified Minor Top plus the minimum monthly Average Daily Balance for our BPI Direct savings account linked to our BPITrade account. "

This amount is prepared for extremely favorable and rare entry signals like when the price trades below stop loss level based on recent Minor Bottom.

Buy weakness
At this time, it would have been ideal if we have 3,500 pesos in available cash to take advantage of falling stock and buy weakness.

Outlook
Reading from the Market Watcher Daily Market Summaries for Philippine Stock Market prepared by BPI Trade this June 30, 2009, the keyword is consolidation, even a hint of continuation of current trading pattern. Marginal Stock Trader will, for the time being, follow the rules found in our updated stock trading plan.