Revolutionizing My Returns

The shake out is a simple process in which you are convinced to get out of a position at the worst possible time before it reverses direction.

The Causes:
Most often we find ourselves shook out of a position when the stock takes a turn in the opposite direction that we had believed it would go.  This can be a good thing if the stock continues to head in that polarized direction, but that would be a “Wise Decision”.  The “shake” element becomes evident when the stock immediately reverses course upon your decision to cut your losses.  Don’t beat yourself up in these situations though, a truly wise investor has stop limits on each of his/her positions that they treat as the law.  It’s just that they sometimes cause you to get the shake out.

The Scenarios:
Most often you will be shook out when a long position has pulled back significantly in a short period of time and it has reached some sort of criteria to cut your loss.  It can also happen on a stock you are short on that has turned positive.  Now, stocks reverse direction for good reason quite often and if that is the case, you should just get out and not wait for your stop loss to be reached.  In the event that you believe the turn in direction is unfounded, then you will need to keep an eye on your bailout paramaters that you already have in place.  And if those criteria are met, and you leave your position, that is when the “shake out” can occur.

The lesser known scenario for a shake out is when you believe that your position has peaked and that the stock is going take a major turn in direction.  You sell your position and the stock continues in a direction that would have made you more money.  Some people will argue that an investor should close out some of a position to take some gains, but the bottom line is if you sell one or all shares of an investment and it continues to go in a direction that you would have made more money….you have been shook out!

The Bottom Line:
Someday, you will get out of a position that you will swear was the exact turning point for the stock.  Grin and bear it.  It is a part of being a serious investor.  The most important thing to remember is to not let yourself get “Whiplashed“.

Trade Well.