The price hits your stop loss resulting in a losing trade…but then you see the price immediately start moving in your direction again. Do you take another trade? How we act in this situation is a significant determinant of our overall success. In this article, I’ll discuss when you should jump right back in, and when you shouldn’t. Including, whether you should jump back in after a winning trade.
Re-Entering a Trade Depends on Trend Strength
My articles and courses primarily focus on trade trends. That means, I am looking for stocks or forex pairs in strong uptrends, and then I am looking to buy during pullbacks when the selling slows and the price starts to show initial signs of moving higher again. Similarly, I will also look to go short in strong downtrends after the price has rallied but the buying has slowed and the price starts to show initial signs of moving lower again.
The main element here is “strong trend.” Whether we are trading forex or stocks, we get to choose which trends (and trending assets) we trade. Therefore, we should always be trying to find the strongest trends. This will give our trades the highest probability of success.
Re-entering trades also depends on whether a valid trade trigger is present, and conditions are right. I will discuss both these concepts throughout the examples below. Conditions you will trade in, and the trade triggers you will use are laid out in your trading plan.
Re-Entry When the Trend is Still Strong
Assuming we are only trading strong trends, then as long as the trend is still strong–even if we get stopped out on our first trade–we will want to re-enter if another valid entry signal develops.
Some of our biggest trades will come on our second entry, or sometimes even our third. This is because the market often has a false move in the opposite direction before a big move in the trending direction. In all my courses I discuss false moves, because they are so powerful. You may have a great trade setup where everything looks great. But instead of going in your direction it blips past your stop loss, resulting in a loss, and then runs in the direction you expected. If the trade was good before, it is often even better now. The price tried to move in the other direction and quickly reversed back in the expected (and strong trending) direction. Get back in!
Here is a Canadian stock that recently had this type of move. The initial entry was based on the pullback slowing within a long-term strong uptrend. The price consolidates and then breaks higher again. A long trade is taken with a stop loss below the low of the consolidation (bottom of red box). The price initially moves higher but then drops, hitting the stop loss. The next day the price has a big rebound: a bullish engulfing pattern which is another entry trigger I will sometimes use (I generally prefer consolidations).
This is a powerful pattern because the overall trend is up, the move lower just barely went below the prior low which triggered a whole bunch of stop losses, but then the upward momentum immediately resumed pushing the price up more than 10% in a couple weeks. The price has not yet to hit the target initially set (top of green boxes), but profit could be taken now for a 2:1 reward:risk, or a trailing stop loss could be used to make sure this decent gain doesn’t turn into a loss.
As a side note, holding trades through earnings is a personal decision. There can often be big moves, and they can go for you or against you. If unsure, get out before earnings!
Avoid Re-Entry In Weaker Trends or On Failed Transitions
If the price hits our stop loss, but the trend wasn’t a very strong to begin with, then the price hitting our stop loss was a good thing and alerts us that this is a not a good asset/trend to trade. We don’t re-enter.
Also, we may sometimes take trades at transition points. Maybe there was weakness in an uptrend, but the price has stabilized and if it has a strong upside breakout the uptrend will re-emerge. In this case, we have an equal chance for a positive or negative scenario (but our reward-to-risk is favorable so we may opt to take the trade). If the negative scenario develops, we don’t re-enter after we are stopped out.
Here’s an example where this happened. This stock had loads of movement. It was in a much deeper pullback than I usually want to trade. But, the stock had shown some recent signs of strength: it made a higher swing low and moved up to the prior swing high and was consolidating there. If it broke above that resistance area there as a good chance for a strong pop.
The stock moved slightly above the resistance area, but then quickly failed. Got out for a small loss and didn’t consider the re-entry.
For context, I have included three moving averages on the chart. While I don’t usually have moving averages on my chart, they can be helpful. Notice how at the time of entry (the green and red boxes show the risk and potential reward) all three averages are either flat or pointing down. This lets us know there is weakness (also evident just by looking at the chart). Because of the potential for a big move if the price breaks higher, I felt the trade was worth taking and risking a few percent. This is one of those trades that has to work out very quickly or I pull the plug; the stop loss is tight. A move above resistance was the only reason to get long, so when that failed, it was important to also be aware of the negative elements and realize that the stock could deteriorate quickly. It did (also on earnings…but I was out before that).
In situations like this were the bullish scenario fails, there is the option to change directions and go short. So while we wouldn’t consider re-entering long in this case, we could re-enter in the opposite direction.
Avoid Re-Entry After Signs of Reversal
Trends that were once strong will also eventually weaken and reverse. Therefore, just because a trend was strong when we took a trade doesn’t mean it will stay that way. The future is always unknown. If we get stopped out in a trend that was once strong, and the price keeps moving against that trend, that may indicate a much deeper pullback is underway, or possibly a reversal. In this case, we don’t re-enter.
Here’s an example of this scenario. This stock was in a fantastic uptrend, and over the last year pullbacks had been relatively small. Therefore, in July when the stock pulled back and consolidated, it was a valid trade when the price broke back above the high of the consolidation. The trade quickly failed, though, on a sharp drop (notice this is was due to earnings). Because the price dropped below the stop loss, and kept dropping, we are not looking for another trade…at least not immediately. As long as the trend remains up we can look for trades down the road, but this stock never gave us another buy signal. Since the price keeps dropping after stopping us out, we leave this stock alone for a while.
This is a log chart that shows the large price more clearly than an arithmetic chart.
Re-Entry After a Winning Trade
What if you just got out of a winning trade? Do you consider re-entering if another valid signal occurs? Assuming everything still looks good, yes! When an asset is in a strong trend, I may end up taking making many trades during that trend, locking in profits along the way.
Many new traders struggle with this. They think that since the price has already dropped or rallied so much, the trend can’t possibly continue. They often make the mistake of trying to anticipate the reversal instead of capitalizing on the trend that is right in front of them. Yes, all trends eventually reverse, but it is far worse to miss out on a profitable trade than it is to take a small loss. I expect to make at least twice as much on winners as I lose on my losers, so missing a winner hurts far more than taking a loss. As long as valid signals occur, and everything looks good, keep hammering those trades.
Take this stock for example. It provided multiple opportunities for trades over its more than two-year rally. Yes, there is the possibility of losing a trade or two, but the winners more than made up for it. And a trader who thought the price had already risen too much would likely have missed out on the last three trades.
Even a strong trend isn’t presenting valid trade setups all the time. Spread out capital over multiple strong stocks. Deploy capital only when an asset is in a strong trend and presenting a valid trade setup. For example, if you were watching this stock, during the times when there were not valid trades, look for other stocks presenting good trade setups.
I will often have about 6 swing trades going at one any time (assuming I can find valid trade setups). I am always looking for new trades so that I can put capital back to work as soon as one of my other trades ends. That’s how you compound returns and lock in profits along the way.
Careful of Over-Trading
There is a big distinction between re-entering a trade because it is still a valid opportunity, and re-entering a trade because we want revenge for the loss.
Make sure the opportunity is valid. Look at the trade with fresh eyes. Don’t let the recent loss skew your view. If you hadn’t taken the prior trade, would you want to take the new trade that is developing now? If the answer is YES, then take the trade. If you are just mad because you lost money and want to make it back as quickly as possible, that is not a valid reason for entry. Be patient. Another opportunity will come along, and if you focus on trading the strong trends, then that money will be made back quickly. Take random trades, or trades in weak trends, and losses will likely mount.
Trade Re-Entry Guidelines Summary
If there is still a strong trend and you are stopped out, but then another signal occurs right away, consider taking it. Especially if the move you were stopped out on is quickly reversed by a strong move back in the trending direction. The market doesn’t care that you lost. Sometimes we will end up in trades before the asset is ready to move, and we get stopped out. What matters is recognizing that it is still a good trade and capitalizing if another opportunity materializes.
If the trend wasn’t that strong in the first place, it is probably best you got stopped out. Look for better opportunities.
If an asset with lots of movement is at a transition point, this may be a worthwhile trade even though we can spot both positive and negative things on the chart. In these situations, I typically want a very high reward-to-risk. If the price fails to move in the expected direction, cut losses quickly. It may even be prudent to take a trade in the opposite direction.
If the price moves through your stop loss quickly and doesn’t move back in the trending direction, there is no new trade signal and we don’t re-enter a trade. Maybe down the road another opportunity will materialize, but until another valid trade trigger occurs, we stay out.
If we have a winning trade, we keep pounding the valid signals in that strong trend. The strongest assets rise (or fall) way more than most people ever expect. As long as the trend is strong, and there are valid signals, keep taking trades. If you just had a winning trade, but the trend weakens after that, then it is probably best to find a stronger trade candidate.
By Cory Mitchell, CMT
If you are interested in learning a complete method of swing trading stocks, including how to find trades, how to manage risk, where to enter, and where to exit, then check out the Stock Market Swing Trading Video Course. More than 12 hours of video show you how to swing trade efficiently and profitably, in about 20 minutes per day.