Adjusting a Stop Loss To Maximize Gains

This article is on learning about adjusting a stop loss to maximize gains, and hopefully spending time learning and practicing before you actually need to do so.

With the stock market taking a swan dive this afternoon (May, 6, 2010) of nearly 1000 points in the DOW, this was a great situation of when knowing how to do this ahead of time, would have helped out tremendously, as you'll see in the example below.

Sometime in the third week of April, a friend of mine who has a financial website also, Great Option Trading Strategies, mentioned in one of our crossing emails something about symbol VXX (S&P 500 VIX Short Term Futures ETN), and that it looked like a good entry point to him.

Since I follow the VIX sometimes myself, I took a look at the chart and saw that it was at a multi month low. I was probably busy doing other things also at the time, so I didn't take any action at the time.

Two days later on April 20, 2010, I took another look and noticed VXX was about 5% lower and seemed to be forming an intraday base (I'm an intraday trader so things like this are what catch my eye, although intraday patterns are far less accurate for longer term trading). Being even lower now, and approaching multi year lows, I decided to take on a position with 1350 shares, in my simulated trading account (unfortunately).

My goal when I entered this position was to try and take advantage of a potential near term top in the stock market, betting on a potential sell-off raising fear to extreme limits (okay maybe not extreme, but at least enough to produce a profitable swing trade).

Fast forward to this week and VXX was moving up nicely, breaking out to multi-day highs. Two days ago VXX was over $22.00 when I checked it and decided to enter a Stop Loss order at $22.10. It was afternoon that day and it was trading around $22.50 I believe.

I had decided that with the unrealized gains I already had, getting stopped out at $22.10 would have been more than enough profit for this one trade. If I didn't get stopped out, my goal was to check again the next day.

The next day I looked once more and VXX had shot up around $24.00, and then pulled back near $22.50 by the time I had checked it. I made no changes.

Now comes today. I had briefly checked the price around 11 a.m. today and seen that it was again just above $24.00, near $24.30 to be exact. I decided to take advantage of the new profits, and I moved my Stop Loss order up to $24.00 and I stopped watching it.

Later on around 2:30 p.m., I checked again and noticed the price was moving to new intraday highs. The price was now over $26.00 so I adjusted my Stop Loss order to $26.00, again, taking advantage of the extreme price movement that was occurring. Little did I know what was happening in the overall market at the time because I've been trying to keep my television off to tune out "noise" in the markets.

I did though, have multiple charts open and I could see the "panic button" was being hit by the masses. As the price continued higher, I watched and made my decision to try and maximize my profits as the panic was occurring.

I wound up moving my Stop Loss order up to $27.00, $28.00 and finally a minute after changing it to $28.00, the price of VXX was over $31.00 so I changed it again to $30.00 at 2:45 p.m. I was stopped out at 2:48 p.m. at $29.99.

Adjusting Stop Loss Orders to Maximize Gains

Adjusting Stop Loss to Maximize Gains - Orders

All in all, I was in this position 16 days total, for a 64.33% profit, capturing around 36% of that just today alone.

Adjusting Stop Loss 1 Month

Had I not made my decision ahead of time to adjust my Stop Loss order to try and maximize potential profits in this trade, I would have given up around 18% of the profits I did capture, had I waited until the end of the day to close my position.

Yes, VXX could have very well gone higher, and may still climb higher from hear in the days to come, but, what I did was make a decision ahead of time, plan out what to do to fulfil my decision and I stuck with it.

Even if you are in a position that winds up being a loss, planning ahead of time and following through with your decision, always is commendable. (You can always give yourself an Attaboy!).

Seriously, the point here is to make decisions in advance that can take care of any potential price movements that may occur. While it is much harder to do with real trading funds, I hope anyone reading this may learn something from this example (to think about being prepared to adjust stop loss orders as necessary to maximize profits), I know I always learn from examples as best I can.

If you'd like to be able to practice different strategies without risking your own money, you can open your own free Free Simulated Trading Account here:

Note: In reality and real trading, I wouldn't have used "round numbers" for my Stop Loss price levels. It is common for prices to attempt to reverse at "round numbers". Even though this was in my simulated trading account, I should have used different price levels here as well. Preferably somewhere just below the "round number" levels.

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