Stuck in Baidu (BIDU) again? Here’s how you get out of it…or into it…tomorrow morning. (October 26, 2017)BIDU
What I want to look at here in this Chart of the Day video is Baidu ( NASDAQ:BIDU ) and here is why: The stock has been working for quite a few points, let’s just say. They reported earnings and basically let’s just say they were a disappointment. Let’s set up for a trade tomorrow. The last thing you want to be doing is selling at the open. If you are long this stock and you were hoping for a big pop, you are learning the downside of gambling, they will take your chips if you go bust. That is our case here.
If you are selling the stock at where it is opening right now you are down 9 percent or so, and who knows where it is going to open tomorrow morning? You are down 9 percent, you are locking in the loss. If the stock opens at 235.00, that is your print, right there. So if you bought it at 260.00, now it is at 235.00; you have lost $25.00. And if you sell it there you are locking that in. You can’t lose any more than $25.00.
Of course, if the stock rallies you don’t get to participate. So I am not saying that if you are long just hang on to the stock. I am saying don’t sell it at the open, and there is a big difference. Because if you say, “I am not going to sell this stock at the open. I have got the stock. I am not happy about the loss. Stupid me, I shouldn’t have bought it. I shouldn’t have held it over earnings. What was I thinking?” Then just assume that you bought it at 235.00.
Now what are you going to do? Now you set your stop. How ever the stock is trading that is what you use to set your stop, the reference from the open. Because who in their right mind would ride a stock down 10 percent, almost $25.00, and not be stopped out by then? The only way you would do that is if it gapped down like this thing has. So that type of a risk management tactic, where you set a fairly tight stop so that you are not risking a lot of money, well, that just went out the window; it didn’t work. Okay, so the stock has gapped down. So you say, “Oh crap! Alright, l me treat this as a different trade.” So you assume that you are buying here.
Now if the stock starts moving down a couple more dollars, then you go ahead and take your loss. I would rather not take a $25.00 loss than I would take, say literally, a 27.00 or a $28.00 loss in this case. The reason being, because if I am selling at the open, again, I am locking it in, locking in the loss, I am not giving myself a chance to make any money back. On the other hand, if I hold on to it then yes, the worst case scenario, it falls a little further and then I go, “Okay, I have got to sell the stock, never do this again.” That is if you are caught in the stock.
Now, if you are looking to buy it, well guess what? You are going to take the same approach only on the opposite side of that trade. The stock opens up here, let’s say you are buying the stock, I would never set a stop on an initial position more than say 3 or 4 percent, something like that. So wherever you are buying this at you take the stock, decide where you are going to sell it at; this isn’t really a good example because this is after hours P.M. And the way you would do this is, buy the stock somewhere here, maybe here, and then your stop is based on this low here, so it is about 5 percent stop.
Do that same technique tomorrow. Try that same strategy at the open. If it looks like the stock is down too far and then it is starting to snapback, you buy that stock. And who are you buying it from? You are buying it from the guy who bought it up here and is saying, “Crap! I am going to lock in that $25.00 loss because I didn’t listen to Dan’s video.” You are buying it from that guy. And then as the stock runs up more, that guy, of course, is buying back the stock and he might just be buying it back from you.
So that is the big deal with Baidu ( NASDAQ:BIDU ). Just make sure that you know which side of the extreme you want to be on and whether you are locking in a loss. Or, whether you are putting yourself in position for a gain.