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Stock Ideas Investors Daily Edge How Many Stops Did You Hit this Year?
Stock Ideas Investors Daily Edge How Many Stops Did You Hit this Year? 
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By Chris Johnson Dear Reader, Investors vote their approval and disapproval of the Fed by buying or selling stocks. So last week’s 25 bp cut to key interest rates seems to have disappointed, even though the writing of this outcome was clearly on the wall. It was interesting that the Fed announced a plan to... |
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| How Many Stops Did You Hit this Year? |
| Thursday, 27 March 2008 | ||||||||
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In the early 90s, newsletters began telling people to use trailing stop losses. And now I hear from people in all parts of the world that they consider themselves to be very responsible about using them. The most common practice seems to be to sell automatically if a stock falls 25 percent from its most recent high. Yeah, well a lot of responsible people got hit in the solar plexus this winter following that advice. Hard. In the United States, there are nearly 6,000 active stocks (5,663 to be precise) that trade at least 1,000 shares per day on average. As of Monday’s close, 69 percent of them were at least 25 percent below their 52-week highs. That was after the market had re-gained 6 percent in a week. That means millions of stops got triggered. The worst of it is this: about 70 percent of the stocks that just barely hit their 25-percent trailing stop losses this year are now above the prices where the stop-loss investors folded. Many of these stocks will not drop to that stop-loss point again. So thousands of investors took the worst price the market had to offer because they acted automatically instead of mindfully. There were many reasons why the market fell this winter. Hordes of investors/traders using their pre-set trailing stop-loss - all aimed at the exact same 25-percnt decline from the high - played a big part, too. Their intentions were good, but think about it … If 20 million people all follow an automatic rule to sell a stock once it drops 25 percent from its high, what do you think is going to happen in a bear market? This triggers massive automatic selling on top of the overall market’s downward drift. And none of it has anything to do with the company. I don’t like one-size-fits-all stop losses. I never have. As you have seen from your first two weeks of chart reading, critical areas for a stock may be 15 percent below a high, or 30 percent, or some other percentage. It depends on the stock. I consider it better to know what you are doing when selling instead of blindly following a program. There are two smart ways to sell a stock. One is to decide how much you definitely want to keep and get out if the stock drops to that number. It doesn’t need to be 25-percent down. If you’ve made 100 percent, you may want to keep 90 percent. Set your stop loss there if that’s the case.
Since there is actually no good fundamental or technical reason to sell at 25-percent down, there’s no advantage in losing that much if you don’t want to. (There is a “magic” number, perhaps, but it is the Fibonacci number of 38 percent, not 25 percent. More on that some other day.) The other way to sell is by informed decision. Either follow the company fundamentals and stay while they’re good, or use your charts and sell at a place that makes technical sense. A blind 25-percent stop loss is questionable in a good market, and downright dangerous in a bear market. But maybe you already know that. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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