You remember (they show it on TV every year) the running of the wild bulls in Pamplona, Spain. Some of the nuttier people get out their capes and stand in their path as they come roaring down the street.
Our would-be matadors wave their home made cloaks at the bulls hoping the bulls will charge at it and not at them. The list of casualties at the end of the day is sometimes quite large, but, fortunately, not too many are killed.
These two participants, the bull and the make-believe matador remind me of the those same participants in the stock market. The bull is Mr. Market and the matador is the make-believe investor.
Why do I call him a "make-believe investor". Because as a former 17-year exchange member, floor trader and brokerage company owner I have had many clients who thought they were "investors". As a professional I would watch many of the dumb things (like standing in front of a charging bull with a rag in their hand) that clients would do with their money. Many times I could talk them out of it, but others they would insist on being gored.
The professional trader learns very quickly that you cannot stand in front of a charging bull who happens to have the shape of a stock market that is going full speed either up or down. Investors love those upward moves, but a few will say I have a nice profit now so I'll cash in and take the money only to see their stock, mutual fund or ETF (Exchange Traded Fund) continue its skyward journey.
The problem was they were guessing that their price was at or near the top of the move. Is there any way to know what is the highest price? Actually 'NO', but there is a way to catch a very large percentage of the price advance and have Mr. Market tell you when to sell. How? Let me show you the time-honored secret of the long-term professional traders.
Stocks do not make an orderly procession to a top and then turn down in an orderly fashion. They move in stair steps up sometime 2 steps up and one step back or 3 steps up and one step back. Many times they will rest for long periods and consolidate. What you can do is place a stop loss order that should be moved up as your equity advances.
Suppose you bought AT&T at $50 several years ago and had followed it up with a 10% or 15% stop loss order. It went over $100 and then started down to below $15. If you had been following with your stop you would have sold out about $85 or $95. The charging bull when it changed direction would not have gored you.
There is nothing to fear as long as you are protecting your investment with stop loss orders. The bull is your friend as long as you have protection when his direction changes.
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2005.