Stops Make Money

During the day I watch CNBC-TV, the stock market channel. Fortunately, I keep the sound muted or I would be hollering at the dumb "experts" being interviewed. The experts seem to know all about the market except they don't know how to protect their capital.

Every few minutes there is a chart in bright yellow of some stock showing its price performance during the past year. Lately it seems that most of the stocks have lost from 50% to 80 or 90% of their value.

Oh yes, this beauty did go up from 20 to 120, but is now back to 20 or some number very close to erasing almost all of last years profits, many going to a loss. The commentators give a nice running explanation of the "reasons" this stock did what it did. All hindsight and we know hindsight is 20/20.

Not once have I heard one these mavens ever suggest that a trailing stop would have sold out the stockowner at a nice profit within 10 or 20% of the top of the move. Microsoft went to $120 and proceeded to lose 50% of its value, dropping to $60. If you had had a distant trailing stop you might have been sold out about $90 or better. If you are still in love with MSFT you may now buy many more shares than you had before. Make sense?

There is a correct way to use stops, but the best is a mechanical method. Just set an amount you are willing to give back. Some traders recommend an 8% stop, others 15% to 20% of the low of the previous week placed with your brokerage firm each Monday morning as a Good-Til-Cancelled sell order. There is also the simple close below the 20-day moving average computed weekly. And many others. If you care anything about your money you might want to do some study to see the type of stop you might wish to employ to protect your capital.

Most professional traders, and I know most people are not professional enough to do this, will place their sell stops below what they consider to be critical support. This is a matter of interpretation and requires experience. I can almost guarantee your broker doesn't know how to do this so you should adopt one of the mechanical methods. When your stock or mutual fund is making that loud swishing noise going down the porcelain container your broker always comes up with the sage advice, "You are in for the long term" or "The market always comes back". In your lifetime?

Take a look at some of the dogs you are carrying in your portfolio right now. Figure out what would have happened if you had put in a trailing stop. My experience of trading for more than 30years has shown that if you had been stopped out that within 60 days that stock will be trading lower than your sell price about 80% of the time.

The first rule of investing is to protect your capital. Use stops.

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

In The News:


Understanding a Stocks PEG Ratio

A PEG ratio cannot be used alone but is a... Read More

Price Targets

Every day in any financial publication you will find the... Read More

Cash Is A Position

I go to the Money Show every year to visit... Read More

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

'Sector funds are too risky.' 'I doubled my money with... Read More

Trading Stocks ?Never Forget About A Past Trade

We all know that emotions control every decision that an... Read More

Forecasting the Stock Market

Every day I see in the financial section of newspapers... Read More

Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Buy high and sell low -- It's not a typo.Millions... Read More

The Top 10 Reasons to Invest in Mutual Funds

Everyone who follows the financial news has heard of mutual... Read More

Analyzing Growth Stocks: An Important Focus For Any Investor

Analyzing growth stocks is an important focus for any investor.... Read More

Dont Lose All Your Money

That sounds like good advice doesn't it? Don't lose all... Read More

Shorting Stocks ? The Basics, Part II of II

After the publication of the first part of this two... Read More

Complacency Indicator

If you haven't heard of the technical indicator with the... Read More

Emotional Maturity

If you are going to be a winner in the... Read More

Will the Stock Market be Lower in October?

The stock market often closes a week in the middle... Read More

Enronization

Even if you don't own any of their stock or... Read More

A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

This is a rather simple strategy with which I am... Read More

Economists #2

Economists know more about how the fragments of society work... Read More

Who Knows?

The Shadow knows. Remember him? It seems a shadow has... Read More

The Secret Method to Selecting a Winning Trading System

Every successful trader has a winning system. There are of... Read More

Time Out

Are you paying any attention to your retirement savings? Do... Read More

Investing in the Stock Market

From the book 'The Stockopoly Plan' by the author Charles... Read More

Trading Tips No 6: The High Cost of Low Cost Stock Market Information

It has been said that low cost or even free... Read More

Oil Stocks As A Long Term Investment

The demand for world oil is increasing while world reserves... Read More

12 Basic Stock Investing Rules Every Successful Investor Should Follow

There are many important things you need to know to... Read More

Choosing a Stock Broker

If you were to find that you had some severe... Read More