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By Ryan Cooper
Many people have a hard time sticking to their stop-loss on stocks priced above the $60 to $70 range. These stocks can suddenly move 25 cents or more in a few seconds, triggering and speeding beyond the stop-loss. Because the stock’s price can jump so quickly, the trader thinks that he will take his stop-loss when the price moves back a bit, which never happens. Suddenly, a couple of minutes later, the position has broken past his stop-loss by more than 50 cents, and the trader feels that he cannot take a loss that large. So he waits, and then he is down more than 1 point and he takes the stop-loss at the maximum level of pain. (Of course, after the trader takes the stop at maximum pain, it begins to trade in his desired direction!)
This same trader will stick to his rules more easily on a slower-moving $20 stock. Lower-priced stocks tend not to move so quickly that a trader decides he cannot take a loss that large. A heavy-volume $20 stock moves more slowly and allows the trader to get out of his position closer to the actual stop-loss price.
Stocks that have different average daily volumes also tend to act in their own way. Let’s say we have two stocks, both trading at $30 a share. The first stock has a tight spread and an average daily volume of over 8 million shares a day. The other stock trades an average of 500,000 shares a day with a much wider spread. The movement of these two stocks is completely different. Your ability to keep a tight stop-loss or to exit easily a winning trade greatly varies.
This does not mean that you should only trade liquid stocks that trade more than 8 million shares a day. It means that everyone has a unique personality, and some personalities can trade illiquid stocks better than liquid stocks. But traders without experience cannot exit losing or winning trades in an illiquid stock accurately. New traders should wait to trade illiquid stocks until they have experience with order routing and order fills.
To read more articles from Ryan, please click here.