Beware Of Trading Stops

Includes: DIA, QQQ, SPY
by: Jeff Miller

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 Tuesday'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 Tuesday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.