Risk Illustrated

I saw the type of chart today that never fails to remind me of the importance of risk management. That chart was for Genie Energy (GNE).

Genie Energy (GNE) Daily Chart - December 11, 2013

Genie Energy (GNE) Daily Chart – December 11, 2013

logo-gneGNE had some huge advances to successive all-time highs beginning November 25, carrying it up to 17.45. After it flagged for three days, GNE surged again to a new high of 17.80 on December 4 before retreating a bit. December 5’s closing high of 17.57 had Genie appeared poised to continue higher on another breakout.

Regardless of the catalyst that derailed any chance of further gains, if you were in GNE at these levels and thinking of an exit strategy you might have had 15.97 to 15.70 in mind if the price happened to fall beneath that area. If December 6th’s 11% drop on high volume and close at 15.64 didn’t stop you out, hopefully the following day’s gap down was sufficiently convincing.

All of Genie’s momentum building from October, seemingly set up for more, was erased with a four-day, 41% plunge on massive volume. That 41% drop equates to a 70% profit loss earned over the previous five weeks.

The suddenness and severity of this type of reversal highlights the need to have an exit strategy in place before any trade is entered, and the need to follow it. Having a plan already in place prevents making decisions under what could be a fast-moving situation that’s highly charged with emotion. Those are conditions that can easily poison a trader’s good judgement.

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