Like it or not the best opportunities in the market right now are in low-priced, ultra-volatile stocks.
Just a few weeks ago ticker symbol TOP went up 1,000%, and GDC went from $2.90 to $44.50 in a single day…
They are scary as hell…but I’ve figured out a way to trade them without exposing myself to too much risk.
And it’s largely because I ignore this one risk management tool.
In fact, if you’re gonna trade high-flying Supernovas with this “safety tool” there’s a good chance you’ll get wrecked.
Table of Contents
A Dangerous Way To Trade Supernovas
Yesterday I traded the ticker symbol MVST and at the time of my entry the stock was already up 45%…
Source: StocksToTrade
Now, whenever you’re trading something so volatile it’s scary.
Especially when you trade them like me…when traders are panic selling the stock.
Most traders will tell you to use a stop-loss to protect you against the volatility.
However, that is extremely risky when you are trading Supernovas.
Why Stop Losses Are Dangerous When Trading Supernovas
Stop losses are dangerous when you’re trading volatile stocks…
Here’s why:
- Supernovas are notorious for their erratic behavior. They can skyrocket one moment and plummet the next for no rhyme or reason. This makes it difficult to set a reasonable stop loss that won’t get triggered by the wild price fluctuations. Even the tiniest volume can trigger your stop loss, leaving you with a BIGGER loss than you were prepared for.
- The spread between the bid-and-ask can be extremely WIDE. As a result, you might find that your stop loss order won’t execute when the stock hits your stop price.
- The whipsaw action can make you overly emotional. For example, you set your stop, it gets triggered and then right after your out of the trade the stock reclaims strength and is trading back to your initial entry point. This can force some traders to revenge and over trade.
All in all, using stop losses can cause high levels of slippage, BIG losses, and emotional damage.
How I Stay Safe Trading Supernovas
- Size your position accordingly. I like to start small, which gives me opportunities to add if I want. Also, by putting on a small size I’m less likely to let my emotions get the best of me.
- I’m at my screen focused on the trade. I am not one of those traders who will tell you that you need to be in front of the screen all day. But if you’re in a trade, you need to be present.
- I trade scared. If a stock is up 50% to 100% on no real catalyst, then it can easily give up those gains just as fast. And that’s why I go into my trades scared. I know if I don’t act quickly then I could find myself in a “deer in headlights” moment.
- Have an out in mind and honor it. Before I’m in a trade I place a profit target. And if I don’t like the price action I will bail quickly. That’s why a lot of my trades are closed out for break-even or for small losses. If it’s not doing what I think it should…I’m out. There’s no reason to take a big loss or hold and hope for things to work out.
Final Note
Risk management is essential to your success as a trader. However, some risk management tools like stop losses can actually cause more harm than good. Of course, there are always exceptions to the rules.
But from my experience if you’re gonna trade high flying Supernovas then it’s better to size accordingly and be present while you’re in the trade.
If you want to learn how I trade Supernovas then watch this.
Leave a reply