A Message for “Stop” Devotees: Investing is not easy!

Most people already know that investing (or trading) is not just a matter of having stop loss orders in place.

Whatever the market environment – bullish, bearish, or range-trading – there will be specific stocks that decline. In today's market, with the bogus White House bombing announcement, there were many chances for profit and loss.

The scorecard of winners and losers:

1. If you were trying to "protect" positions with trailing stops, you were a loser. You sold at a bad time (just as happened in the Flash Crash) and you must now decide whether or not to "chase" to re-establish your positions.
2. If you liked the market and had a shopping list, you might have had working buy orders. Congratulations! You are an instant winner.
3. If you were in on the bogus announcement, you might have been selling short in front of the news or buying when it occurred. You have cashed in, and now you must avoid prosecution. The SEC investigates some such trades, but does not do enough. There were many profiteers in 2008….still enjoying their gains.

Here at "A Dash" I have a special focus and fondness for the individual investor. Whenever your long-term positions decline, there are many who advise that you should have had "trading stops" in place. The idea is that you limit losses and let profits run. Like most maxims, it sounds great. In actual practice, we have tested trading stops in any time frame you can cite. It is not that easy!

Investment Conclusion

Rather than following a mechanical system of stops, it is far better to have a fundamental target for buying and selling. If you had that approach, you might have found some bargains today.

 

Comments

[Wisdom Seeker]

Hi Jeff -

I think you can go a step further with this discussion...

First, although those folks with a "shopping list" and trailing buy orders in the S&P yesterday might have gotten a bonus, it's a risky way to trade. Consider those folks with trailing buy orders for gold last week - they were hammered by getting their orders filled at prices which soon proved to be well above the market price!

There's a broader conclusion to both the bear raid and the flash crashes: any time you send a stop-loss order to your broker, you're giving Mr. Market a free option to liquidate your shares at a loss to you (and thus a profit for Mr. Market). In the old days a "flash crash" was called a "Bear Raid" or "running stops", and it was one of the ways the marketeers fleeced the muppets so that the brokers could have their yachts...

Conversely, any time you leave a trailing buy order out there, you're giving Mr. Market an option to dump his shares on you, at a price which might have been fair when you entered the order, but most likely won't be fair when you get your execution.

All options have at least some value. Why give value away for free? Folks shouldn't be giving those stop-loss and limit-order options away to the market, unless they're getting good value in return. Maybe the peace of mind is worth it, but it seems like Mr. Market is collecting a lot of rent from those unwilling to hold their positions with conviction...