Small Cap Death Trap

Here is a picture of how to lose a lot of money as a small cap investor. The following chart (stock name not important) shows a stock that has been drifting for some time and has consolidated in the $0.95 range. Then the stock starts to break out, trading up to $1.09. It looks like the rounded bottom pattern has played out and the stock is back on an upward move. To the contrary, within 4 trading days, the stock trades down to $0.70, a 35% downward correction. What is more painful is that on the way down, the stock appeared to find support at $0.81, only to fall by another 13% the following day! Once the stock trades down to $0.68 many investors will then decide that this has changed from a short term trade to a "long term hold". Investors in at higher levels (around $1.40) have seen a near 50% loss of capital. The unforgiving rule of percentages is that it takes a 100% gain to get back to even. Ask yourself if you would be a buyer of the stock at these levels. Sometimes it's better to cut losses and move on. As to why the stock fell, who knows: maybe a large aggressive seller or concerns about the business fundamentals? It's a painful experience and I have been there before (thankfully not this time). As to how to avoid it this is a tricky one. Maybe monitor for big moves and put the stock on high alert once this happens?

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