This column was originally published on RealMoney on Aug. 11 at 10:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Let's talk about controlling losses vs. losing. The former is a talent of good traders, while the latter is common to pretty much everyone else.
Prudence and discipline demand controlling loss. There are two inescapable realities of speculating in the financial markets. First, you will be wrong on a regular basis. Second, the more you lose, the farther away you are taken from your goal of beating the returns you could get by just buying the SPY.
Two steps forward and one step back is fine, but two steps forward and 12 steps back is not. Good traders avoid the big loss at any cost.
They may get jigged out of the same trade on multiple occasions, but they'll never ride a stock into the ground because they refuse to be wrong.
Good traders understand that it's just plain wrong to insist on being right. Take your lumps and move on.
Losing is different than controlling losses. Losing occurs when we overstay our welcome. We hold on to a stock that's moving against us well beyond our loss control limit.
Once our stop is blown, we are no longer controlling losses -- we are just losing. We are also relying on the oldest strategy on Wall Street -- hope -- to pull us out of the hole we've dug for ourselves.
Rigid control of losses is indicative of a trader that deals in reality rather than wishful thinking.
Winners practice loss control, losers don't.
On Thursday, I heard from a reader who wanted to know the technical condition of a few stocks in some of the more defensive sectors, particularly the beverage group and drugstores.
As we try to learn whether things really go better with Coke and if Pepsi is the real thing, let's take a hard look at the current price in relation to the ideal entry point.
If the current price is significantly higher than the pivot point, then we may have found the right stock at the wrong time.
There's absolutely nothing wrong with the multiyear uptrend on this weekly chart of
. The channel is well defined by uptrending support and resistance lines that are roughly 10% apart.
But after the 15% advance over the past three months, Pepsi is due for a rest. All indications are that Pepsi is moving higher, but the lowest-risk entry is back down near support. Think about it. If you buy too high in the channel and the stock pulls back (as it typically does), then you are uncomfortable by the time the stock challenges support. Rather than being alert and opportunistic, you are tentative and uneasy. You want to control losses, right? You don't want to be a loser.
Well, loss of control starts with the entry, not the exit. When you enter as close as possible to support, it's a lot easier to control losses.
shows a similar uptrending channel, with the current price fairly close to support. If you like Coke, consider taking some stock closer to support, with a stop below the July low. This isn't a fast mover, but it's a good stock to use for developing patience and discipline.
has been topped out for more than a year, churning within a 10% channel. So if you like this company, would you be a buyer now?
Let's say you buy now, and the stock subsequently drifts down to support at $37. Now you're down more than 10%. You're thinking about loss control from a position of weakness. If the stock drops down another few percentage points, you've got to blow out as a matter of discipline. But had you instead waited for the stock to fall back to support before buying, you'd be well within your loss-control plan and able to think clearly. Remember, loss control starts with the entry.
recently broke above established resistance at around $32. The stock continues to run on heavier-than-average volume. Still, it has been advancing for the last five weeks and is due for a pullback. Why not wait for a test of the breakout level? And if you're already long, protect those profits.
A reader asked for my take on
. Notice how the advance has been consistently capped by ample supply at around $74, while demand has been getting increasingly aggressive? Something's got to give.
The longer these types of triangle patterns persist, the more likely they are to just fizzle out. So if you're already long, why not put a stop just below support?
Be careful out there.
At the time of publication, Fitzpatrick held none of the issues mentioned, though positions may change at any time.
Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
to send him an email.