Research for Online Investors
This article originally appeared in MarketToday on
by John Dalt
Stop losses are a tough discipline
to follow, believe me. I still violate trailing stops occasionally. In hindsight, it is always is easy to see a
trailing stop left money on the table. When I see this it makes me want to be brave and ‘hang in there’ against the
market. But, 9 times out of 10, I would have been better off to stay with the discipline.
We have an excellent article on
Trailing Stops you may want to review in our Investor Resources section at the
website. If you haven’t read it in some time, or want a basic primer
in trailing stops, it will help you.
This article is written for the
long-term investor. The primary point is to NOT enter the trailing stop in your computer. Floor traders will dip
the market to take you out. As an example of the dangers of entering trailing stops in your computer, look back to
May 6, 2010. That was the day of the “Flash Crash.” Liquidity disappeared from the market, and stocks dropped
quickly as trailing stops were triggered, but there were no buy orders to take them.
High frequency trader’s computers
pulled away from the market and watched it fall. Proctor and Gamble (PG)
opened that day at $61.19 and closed at $60.75, not to bad of a loss on the most turbulent day the market saw last
year. Except during the day it hit a low of
This was the lowest price the stock
had seen in over seven years. How many retirees saw their long-term
position in PG sold that day? I don’t know, but they had to be sick
about it. Again, never enter stop losses in your computer against long
We monitor trailing stops for our
long-term portfolio subscribers. If a stock closes
below our trailing stop, we issue an order to sell it the next day.
Our trailing stops are triggered on a “closing price” only.
We covered a story about a
“professional” money manager that lost almost all of his customer’s money in the Flash Crash…because he entered
stop losses in his computer. Flash Crash Victims has the story.
If you trade, as we do in
it is ok and in fact recommended to enter your stop losses in your computer. The reason for this is you are looking for a quick gain, against a risk of a
well defined small loss.
In SwingTrader we do not use “stop” orders, we only use “stop limit”
orders. Why? A “stop” order becomes a market order if the stock price drops to the “stop” price. During the
“Flash Crash” stop orders were triggered and became market orders, but there were no market buy orders so the
price kept dropping, and dropping. Eventually some brave soul realized how cheap the stock was and entered an
order. Surprise...he bought PG at a seven year low! Others started buying, and within a few minutes PG was back
up to its fair value price.
A “stop limit” order has a very
important distinction. When the stop price is hit the order is converted to a “limit” sell order. We want to sell
the stock, but only at our limit price. PG could continue to fall, but we would only sell at our limit price. As it
recovered (hopefully) and crossed back past our limit price, the order would be executed.
There is one time we do not enter
“sell limit” orders in the SwingTrader. We are in such a time right now. The market’s low volume is dangerous for traders. Volatility increases because of the lack of active traders. We could experience wild price swings because of the lack of
At times such as this, we watch
our stops on a “closing basis only.” We treat our stops in trading the same as we always do for long-term
investments. If the stock closes below our stop limit, we will sell it the next day. We would not have any stop
limit entered in the computer, as we could get ‘whip-sawed’ out of good positions because of the increased
volatility that comes from low volume.
Good trading, and be careful. If you
would like to trade the market with discipline, check out the SwingTrader.
We like to hold stocks or options for a few days to a few weeks. We look for one good set-up per day.
Take our profits and go on to the next one.
I’m sure glad
I bought my Ford Fusion Hybrid that gets 41 mpg. The neighbors laughed at me when gas was 2.75. We never
learn in this country until we are flat on our backs. Maybe a
dictatorship is the better way to go.--- paid up subscriber J.P.
John’s reply: A dictatorship means you would have bought a Yugo. And all of the environmentalists that stop us from exploring for our own abundant
oil, coal and nat. gas would be in a gulag. On second thought….there is
The information presented in this newsletter is based on generally available news releases, corporate filings,
current events, interviews and the editor’s opinions. It may contain
errors and you should not make investment decisions based solely on what you believe you have read
here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your
grandmothers! The editor may or may not have a position in any
securities discussed. The editor may have held a position in a
security earlier, or in the future.