PDA

View Full Version : Realising a (large) loss



Lego_Man
08-05-2009, 11:29 AM
Last year in July i purchased Rakon shares @ 2.60 - after ascending for a short period they resumed a downward slide, bottoming out at around the 60c mark. They have now rallied strongly back to ~1.50 and i feel like getting out (not that keen to own a stock trading at 30x earnings in the current market). However i am still realising a 40-50% loss. Should i get out, or just leave them and hold out for the long term?

peat
08-05-2009, 11:37 AM
supposedley the question one is meant to ask oneself is : would you buy into this position as of now?

wbosher
08-05-2009, 11:49 AM
I'm pretty green (ok...very green) but shouldn't you have got out WAY before hitting the 60c mark? :eek:

Phaedrus
08-05-2009, 01:27 PM
Lego-Man, If possible, you want to learn something from this unfortunate experience. With hindsight, it is very clear that buying when you did was a mistake - but was it obviously a mistake at the time? Answer :- YES. Why? Because RAK was already in a downtrend. You can see that for months before your entry, RAK was making lower highs and lower lows. See how the On Balance Volume plot at the top of the chart was falling? Volume was moving out of RAK, it was being distributed. There was clear selling pressure. To buy such a technically weak stock was unwise.

So you made a mistake and bought. Not to worry, we all make mistakes. The usual approach, though, is to set yourself a StopLoss. This is a level at which you accept that you have made a mistake, accept that you have made a badly timed entry and QUIT at a small loss. Where you set your stoploss is a personal decision - the chart here shows it as 10%. The actual value is not critical, just so long as you have one. Had you used a stoploss, you would not now be facing a 40% loss.

Take another look at the OBV plot. The abrupt downward "steps" are where big money got out of RAK. Big money is assumed to be "smart money" - people that know more than you or I do. See how this happened in September? Your position was already underwater and you were losing money - this should have been a powerful incentive for you to get out too. A second warning. Look at what happened to the shareprice the first time this occurred.

Notice the $2.08 low back in March 2008. For RAK to drop below this would be very Bearish and confirm that it was in a long-term downtrend. It did. This was your third (and last!) warning.

LM, it was a mistake for you to buy a downtrending stock. Now that RAK is in a steep uptrend you "feel like getting out". This would be making the same mistake, that of ignoring trend, ignoring market sentiment. If you really feel the PE is too high and you want out, at least wait until the green trendline is broken.

There is only one way to avoid realising large losses - realise small ones.
Every big loss was once a small one.

http://h1.ripway.com/78963/RAK58.gif

Don't buy down-trending stocks!

wbosher
08-05-2009, 01:36 PM
Just out of curiousity Phaedrus, do you normally use a line chart to study charts as per your last post above? I was under the impression that bar (OHLC) or candle charts were the way to go.

Phaedrus
08-05-2009, 01:54 PM
CandleSticks are excellent for following shorter-term price action. Line charts are better for the longer-term (if I had used candles here, they would have all run together so as to be practically indistinguishable). I never use bar charts. There really is no single "way to go" - it's horses for courses.

Lego_Man
08-05-2009, 02:03 PM
Lego-Man, If possible, you want to learn something from this unfortunate experience. With hindsight, it is very clear that buying when you did was a mistake - but was it obviously a mistake at the time? Answer :- YES. Why? Because RAK was already in a downtrend. You can see that for months before your entry, RAK was making lower highs and lower lows. See how the On Balance Volume plot at the top of the chart was falling? Volume was moving out of RAK, it was being distributed. There was clear selling pressure. To buy such a technically weak stock was unwise.

So you made a mistake and bought. Not to worry, we all make mistakes. The usual approach, though, is to set yourself a StopLoss. This is a level at which you accept that you have made a mistake, accept that you have made a badly timed entry and QUIT at a small loss. Where you set your stoploss is a personal decision - the chart here shows it as 10%. The actual value is not critical, just so long as you have one. Had you used a stoploss, you would not now be facing a 40% loss.

Take another look at the OBV plot. The abrupt downward "steps" are where big money got out of RAK. Big money is assumed to be "smart money" - people that know more than you or I do. See how this happened in September? Your position was already underwater and you were losing money - this should have been a powerful incentive for you to get out too. A second warning. Look at what happened to the shareprice the first time this occurred.

Notice the $2.08 low back in March 2008. For RAK to drop below this would be very Bearish and confirm that it was in a long-term downtrend. It did. This was your third (and last!) warning.

LM, it was a mistake for you to buy a downtrending stock. Now that RAK is in a steep uptrend you "feel like getting out". This would be making the same mistake, that of ignoring trend, ignoring market sentiment. If you really feel the PE is too high and you want out, at least wait until the green trendline is broken.

There is only one way to avoid realising large losses - realise small ones.
Every big loss was once a small one.

http://h1.ripway.com/78963/RAK58.gif

Don't buy down-trending stocks!

Thanks for the analysis. As i suggested by posting in this forum i am pretty much a newbie to the game, and made a number of newbie errors last year based on (in hindsight) flimsy logic (dont even ask me about Nuplex). This year has been a little healthier, particularly of late, and i am paying a lot more attention to technicals.

wbosher
08-05-2009, 03:28 PM
As i suggested by posting in this forum i am pretty much a newbie to the game

You and me both mate, a lot to learn about this game. When I first thought about getting into this I thought it would be like sports betting, backing a team you felt would do ok and hope for the best...how wrong I was!!!

Lego_Man
08-05-2009, 03:44 PM
Fortunately they say your first year is a good time to cock up, as it forces you to rethink your "strategy", do more research, search for more good advice etc.

wbosher
08-05-2009, 03:47 PM
I just hope I don't use up my "cock up time" when thing are starting to look good in the market, and then finally get to grips with it when things go pear shaped again. ;)