Imagine you have purchased a stock at precisely the wrong moment. The instant you have purchased shares, it begins to drop. It seems like there can be strategies for exiting the position without taking losses if you act in a timely manor. What are the names of the strategies traders use and how do they work?

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    It is called a stop loss order, but I probably would buy puts. – CQM Nov 10 '14 at 15:51
  • Stop losses will reduces losses if perhaps the market takes a swing faster than you can react. Essentially, it is a market order and absolutely anything can happen. It doesn't reduce loss, except to get out at any cost. – osoclever Nov 10 '14 at 15:59
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    conceptually.... in reality the market for shares is much more liquid due to the market makers being mandated to keep the spreads tight... unless you are in penny stocks, as I might imagine. You can try a stop limit order, but the issue is that your limit might get skipped! :) – CQM Nov 10 '14 at 16:04
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    Technical trading schemes like the pyramid trading generally don't work for very long (if they ever really did). If they did work, than a few hedge funds/banks would program a computer to run the scheme and soon the cost of the scheme would rise to the point there is no profit. – rhaskett Nov 10 '14 at 23:32
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    I have created simulations using C# that show this can work, both averaging and pyramiding. Beginning with a balance of $3000, a dip of around -0.25% ends up costing $10000 - $35000 to average out. Large amounts of cash can lower your portfolio averages to current levels but only so many people can afford to invest this way. We all know that bottoms cannot be predicted but current prices can be nearly matched for a price, and surely it is a fairly good assumption you can sell near current levels. I can share the math on it, but it is not efficient. I suspect somebody knows a better method. – osoclever Nov 11 '14 at 19:03

If the stock is below its purchase price, there is no way to exit the position immediately without taking losses. Since presumably you had Good Reasons for buying that stock that haven't changed overnight, what you should probably do is just hold it and wait for the stock to come back up. Otherwise you're putting yourself into an ongoing pattern of "buy high, sell low", which is precisely what you don't want to do.

If you actually agree with the market that you made a mistake and believe that the stock will not recover any part of the loss quickly (and indeed will continue going down), you could sell immediately and take your losses rather than waiting and possibly taking more losses. Of course if the stock DOES recover you've made the wrong bet.

There are conditions under which the pros will use futures to buffer a swing. But that's essentially a side bet, and what it saves you has to be balanced against what it costs you and how certain you are that you NOW can predict the stock's motion.

This whole thing is one of many reasons individuals are encouraged to work with index funds, and to buy-and-hold, rather than playing with individual stocks. It is essentially impossible to reliably "time the market", so all you can do is research a stock to death before making a bet on it. Much easier, and safer, to have your money riding on the market as a whole so the behavior of any one stock doesn't throw you into a panic.

If you can't deal with the fact that stocks go down as well as up, you probably shouldn't be in the market.

  • This is a fact, of course you are right. However, one strategy I have considered is to increase a quantity of the position so that losses have averaged out. This could lead to a very high portfolio balance, but, it could minimize damage and even a small increase could improve probability of profiting. I believe this strategy is called a 'straddle' but it has disadvantages. – osoclever Nov 10 '14 at 15:54
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    Well, if you believe in the stock, you certainly can see a price drop as a buying opportunity. But that's just "hold and wait for the stock to recover" with a new investment alongside it. Whether this is the RIGHT additional investment to make, or if you should put your money somewhere else, requires looking at your whole portfolio and the whole market. It isn't a "strategy", it's just business as usual for investment. – keshlam Nov 10 '14 at 15:58
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    (That's the thing many of the technical "methods" miss. They may -- or may not -- make sense if you're locked into a single stock. They tend to fail badly when you realize that there's a whole market-full of alternatives out there, and that the money invested reinforcing a position in one stock is money not invested elsewhere. I'm a firm believer in "pick your investment mix, maintain your investment mix, but don't get too attached to any single investment." Be willing to accept losses when that's the right thing to do. If you can't, stay with lifecycle funds and/or out of the market.) – keshlam Nov 11 '14 at 23:40

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