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

---

Red, Green, Yellow - or - Stop, Go, Go Very Fast: Which Describes Your Online Trading?

Ever notice how behavior in one area of life can... Read More

Discipline

One of the great "secrets" of successful people is discipline... Read More

Why Change Funds?

On November 17 I bought 7 different mutual funds and... Read More

Fools Gold

The stock market has been in an up trend for... Read More

War Market

There is no question that the stock market is being... Read More

You Don?t HAVE To Be Trading

As a novice trader, you'll often feel the need to... Read More

Investing in Dividend Paying Stocks

I was recently interviewed for a press release through a... Read More

Analyst Reports

When you become interested in a stock or mutual fund... Read More

On Line Stock Trading: Small Cap & Micro Stocks Go Up and Down - How Can You Profit?

Success in small cap & micro cap stock trading like... Read More

Stock Analysis

I receive emails from Morningstar. This company provides statistics and... Read More

Structured Settlement; Lawyers in NY and Mutual Funds

Minority Report the movie may not be far off if... Read More

Starbucks Stock is Up

Starbucks earnings are up again and so is their stock... Read More

What Can Model Airplanes Teach You About Trading?

I was devastated!I just couldn't believe it. I was 10... Read More

Enron Cure

Let's hope you did not have any of the Enron... Read More

Mutual Fund Commissions

You have heard about a particular mutual fund from a... Read More

Successful Trading ? Taking Profits - Part 2

Suppose your position has made a big move and you... Read More

The Stock Market is a Roller Coaster: Prepare for the Ups and Downs

IT'S REMINISCENT OF THE OLD children's tale about an old... Read More

How Covered Calls Turned a Trader Around

Sidney felt sick as she looked at her latest OptionsXpress... Read More

Kick The Tires

Before you buy another car you walk around the lot,... Read More

Alfred E. Newman

What! Me worry?Many of you remember the cover of MAD... Read More

Whitewater Stock Market

Ever done any whitewater rafting or canoeing? Long periods of... Read More

Forces that Move Stock Prices

Among the largest forces that affect stock prices are inflation,... Read More

Oil Stocks As A Long Term Investment

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

Intervention

Intervention. Now don't let that big word scare you. The... Read More

High Price/Earnings Ratios and the Stock Market: a Personal Odyssey

After some forty years of banking and investments, I retired... Read More

Mid-Cap Stocks: Asset Class with an Identity Crisis

Much like the middle child, mid-cap stocks have long struggled... Read More

10 Tips For Creating Wealth From the Stock Market

1. Do not spread your money too thin.My friend has... Read More

A Common Misconception about Stock Prices

I cringe every time I hear a novice investor tell... Read More

Duct Tape

Did you run out to buy that duct tape yet?... Read More

Nest Eggs and Omelets

Do you have a nest egg? You know, a place... Read More

Hill of Hope

Just about now everyone is confused as to which way... Read More

Planning Your Dive and Diving Your Plan ? Trading!

A colleague of mine just returned from a scuba diving... Read More

Trading vs Investing

I often hear from people, "I don't trade. I invest.... Read More