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Monday, July 18, 2005

Using Stop Losses

There is some nice reading on Financial Spread Betting site about setting stop levels as well as other tips for trading. Don't take everything as a complete truth, but it's interesting to read their thoughts anyway.
Most traders set stops at whole numbers. If, for example, there is near-term support for a stock at 55, then one might expect a cluster of sell stops at 54, and again at 53, and so on. Traders gun for these stops in order to scoop up cheap shares. If support is broken, then one might expect the stock to trade down to an even number before support is asserted. For this reason, it makes sense to set your own stop beyond whole-numbered prices. Instead of 54 on a sell-stop, set your stop at 53 7/8 or 53 3/4.

When I was a beginning trader, I met another trader who had run a few thousand dollars into one-half million dollars. He had managed this phenomenal feat by pyamiding a bull move in airline stocks. When I asked him how he did it, he replied, "Each day when I came into the office, I checked my buying power. If I had any, I bought more bonds."

I was at once amazed and alarmed. What a risky way to trade! He put all of his eggs in one basket, and then continued to buy more at higher and higher prices. This man had clearly done everything wrong! He owned only one issue, so he had none of the benefits of diversification. And chasing after the stock as it rose struck me as extremely imprudent, since the average cost of his position continued to rise as well. That made him increasingly vulnerable, since even a modest correction to a point below his average cost would have wiped him out.

And yet, the proof was in the pudding. He had made a lot of money from a little--either through dumb luck, or crazed bullishness, or some craftiness beyond my ken. It took me years to figure out which it was.
Read further:
Financial Spread Betting: Using Stop Losses


Anonymous PENNY STOCKS said...

Great idea to use stop loss orders.

12/03/2012 03:38:00 PM  

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