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Can This “Safe” Risk Management Tool Kill Your Profits?

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Written by Timothy Sykes
Updated 5/10/2023 5 min read

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.


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

what makes day trading stocks
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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

tim sykes grand canyon with laptop
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  • 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

Tim Sykes checking his top penny stocks list in Italy
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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.  

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”