Ask Colin

Is it better to sell when a stop-loss is hit, or wait to sell into the first rally?

In almost every situation, I will sell as soon as the stop-loss is hit. I also sell at the market unless the spread is ridiculously wide. I also sell even if the spread is above my stop-loss, because if a trend has been violated by a significant lower trough, then I am wrong about the trade.

However, there is an exception. In the 1987 crash, the market opened about 25% down and for many stocks there was simply no buyers or the spread was what is called a "disorderly market" eg Buyer $2, seller $8. In that sort of situation it is silly to place market orders and you don't have the slightest idea where to place a limit order. In that situation, I waited for a rally, when the spreads tightened and, as soon as I thought the rally was weakening, I sold.

This can be applied to a single stock also, though rarely is the market truly disorderly in the way it was in the crash. However, there is a warning. If a stock opens 25% down and starts to trade higher off the open, by all means watch and sell into the rally. However, if it opens down and trades lower than the open, I would get the hell out of there by selling into the bid.

The big risk for inexperienced traders in waiting for a rally is that their losses grow and they never sell. For inexperienced traders, my advice is always to sell unless the situation is really unusual.