Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Reasons for Stops

I purchased a bright stock, both technically and fundamentally recently with a ticker of $MIPS. A few days after purchasing it had fairly large percentage gain considering it had only been 2 days. I was planning on holding the stock for a few months, looking for 20% - 50% price appreciation.

The market started to turn and so I placed my stop on $MIPS tighter. I place my stops at a place, where if it is crossed, their is a technical problem with the stock, and I no longer want to hold it. If one of my stops is hit, something is wrong. For this reason I never lower or change stops. They are there. Sure, I miss out sometimes, but over the long haul, risk management is what makes and keeps the money (and this is the holy grail).

I had some visitors comment, and tell me that $MIPS is going to $20. While it may, the weakness of $MIPS was shows today in the following chart.

Image

There are two big problems (there are many issues) with only looking at the upside, without considering the downside of a transaction:

  • When you don't manage risk, a few large moves against you can wipe you out through excessive drawdown
  • If you keep thinking that you are in for the "long haul" to a higher price, you may be right, but during that time that money is tied up in "developing" stock, it could be making money elsewhere for you

The second point is important in having an account make large returns. Basically, it is the law of compounding. This is the point of many growth and momentum strategies. While they don't catch a move from beginning to end, they are only in the move while it is in their favor. So, compounded over time, they make more money than people waiting it out.

Lessons:

  • Set a stop and stick to it
  • Set it where, if it is crossed, there is a problem
  • Buy once overhead supply is cleared, don't be part of it.
Growth Stock Investor