If You’re Not Going to Use Stops… (By Ryan Mallory)

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If you are not going to use stops, because either 1) you prefer mental stops 2) the MM's will "steal" my shares or 3) you're afraid of it popping back up as soon as you get stopped out, is no excuse to not use stops, in fact, if you don't do it, you better confine yourself to a life defined by Dwight Schrute – pay careful attention to what he is doing AND what he says is the reason for doing what he is doing!

Is it extreme what I am saying here? No, it isn't. In fact, it couldn't be any more true. Take for example last week, MasterCard (MA) and Visa (V), after the fed introduced a proposal for interchange fee regulation right in the middle of the trading day. Had you decided to buy MA and subsequently take an 'extended bathroom break", within 20 minutes MA would have dropped from $253.35 down to $232.50 for an 8.1% decline. Had you decided to grab a bite to eat (assuming you washed your hands of course), you would have come back to a 12.5% loss. Visa was even worse, a quick run to the local Piggly-Wiggly and within 30 minutes you have an 8.8% loss on your hands, and if you go back for desert, you have 14.6% in losses. And let me tell you, your stomach isn't going to be the only thing hurting after that quick bite to eat.

Don't think that Visa and Mastercard are the only instances of this, stocks like Dendreon (DNDN) saw its stock drop from $22.50 all the way down to $7.50 in a few moments back on 4/28/09. Yes it did recover, the next day, as it resumed trading in the $20's, but when the bottom was literally falling out from underneath it, you had no clue what its fate would be the next day, and I for one, would rather be stopped out 4 or 5% below the current share price and see it pop back up the next day (which of course happens to me quite often), rather than wondering at sub-$10, whether the stock would recover or not. Because, folks when stocks get torn up like that, and at a pace as ferocious as what I just explained, you're not thinking about the what-if's for tomorrow, instead you are staring solely at the deep bloody red color in your account with a loss larger than what you had ever desired to take on.

You see, small losses are okay and are very recoverable, and at times, if you continuously take small losses over time, you will have instances, where the Market Makers stole or shook you out of your shares, you'll see your stop triggered only to have it go on to be a would be stock pick of the year, and many other cases that seem unjust and unfair. But that is part of the game, and trust me, I'd rather take a small loss from someone who wants to take my shares at a cheap price, then let one of these stocks (or a flash-crash too) rip me a new one, because my ego was too big to control losses by any means other than a stop-loss. And because of the examples outlined above, and how close I was to buying Visa (V) as a legit breakout play back on 12/15, that if I didn't use hard stops I'd be like Dwight with the a 2-liter bottle in hand for when nature calls. 

Checkout Ryan's Blog at SharePlanner.com