Schaeffer's Trading Floor Blog
Stocks quoted in this article:

Continuing the discussion from last week on the use of stops, Gary (who started the discussion) says - "Regarding the use of stops, I have frequently heard the arguments against using them, but I beg to differ. I have never yet regretted using a stop. The problem is, many people try to make the use of stops too simplistic. My use of stops is very disciplined and I use a number of different scenarios including:

  1. I never place a hard stop with my broker for a listed stock. Why? Because of the spread and the fact that I don't trust specialists. However, I do alarm my positions and when they approach my stop, I manage my way out of the trade. I definitely use a stop. I just don't automate it for listed stocks.
  2. If I am trading a microcap Nasdaq stock, I use a stop limit because these don't tend to move more a penny or so at a time. Many platforms also allow you to use "discretion" on a limit order meaning you can give it +/- window. This also allows me to use advanced features such as "show only" so that I can serve up the shares without tipping my hand as to how many I actually have to sell. This prevents the bid from collapsing. You have to know the trading behavior of a stock well in order to use stop limits, however, I don't recommend it unless you are an experienced trader.
  3. The use of stops for day trading is a must. Stocks rarely gap during the trading day so I have never found this to be an excuse for not using stops. Keep in mind that if a major gap occurs during the day, it will be drivne by news and trading will likely be halted, giving you time to cancel the stop and manage your way out of the trade.
  4. If a stock is extremely volatile or I am holding a large position I will use mental stops by alarming the share price and managing my way out of the trade. This way I can avoid collapsing the bid or tipping my hand as to how many shares I have to sell. There also seems to be this myth that stop orders are visible to traders. I don't believe this to be true. It is my understanding that the brokers hold the stop market orders until they trigger and then submit a normal market order. Market orders do not show up on level 2. A stop limit might be slightly different, but I still do no believe these will be submitted until they trigger and it is only then that they show up on level 2.
As for the argument about huge gaps down overnight, this can be a problem. However, this is still no excuse, in my mind, for not using stops. In swing and long term trades, I never place hard stops, but I do alarm my stops. If the stock gaps against me in the morning, I use disaster management rules to manage my way out of the trade (sometimes I wait 30 minutes to see if it will give me an exit on a bounce). The same reasoning applies to limit orders at targets. What if a stop gaps for you and you have a limit order placed below the gap. You can leave a lot of profit on the table. This is no excuse for not having a target. If you don't want to put in a hard limit order, use alarms and either trail stop once past your initial target or adjust your targets and stops accordingly. I just personally think it is extremely dangerous to avoid using stops.

There are too many way to use them to simplistically say they are no good. There has to be some point at which you say this trade is no longer working. If you hold onto the trade indefinitely waiting for it to reverse you could ending either losing a great deal of money or having to sit on "dead" money for a long time and "dead" money is one of the worst things that can happen to income traders like me. In my particular case, if I had not followed my stops on my bad day, I would have turned it into a disastrous day and I would never have been able to make up the losses the following day as I did. Stops are an absolute necessity for me and I never enter a single trade without having a stop and target(s) in mind.

My response - I apologize for the length of this post, but I thought Gary brought up some great points that might benefit some of you. In the end, each person needs to have a trading style that fits their personality. The various emails on this topic highlights how different those opinions can be so I wanted to make sure we explore the issue of stops from many perspectives. Thank you again to everyone who has contributed to this effort!


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Stocks quoted in this article:

I was just going through my list of Exchange Traded Funds (ETFs), which is ranked by their year-to-day returns. At the bottom of the list is the Internet HOLDRS (HHH) with a loss of a little more than 20-percent. This compares to a loss of just over one percent for the S&P 500 (SPX). A check of the HHH chart shows an interesting development.


Created with SuperCharts by Omega Research

I have been tracking this chart for some time (we last looked it earlier this month) as the HHH has been struggling since breaking that two and a half year uptrend highlighted by the red channel. The green line is the 10-month moving average which has capped the shares this month. Major support sits near 50, which was low for this year and was the closing low for 2004.

This is worth noting because there has been a good deal of buzz around internet stocks. With more than 70 percent of the analysts tracked by Zacks rating Yahoo (YHOO) as a "buy" and eBay (EBAY) gracing a couple of magazine covers recently, it appears that expectations are fairly high. While that doesn't dictate that a fall has to happen, it does raise the odds that a disappointment may be lurking...

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At the Open

by 6/27/2005 9:55 AM
Stocks quoted in this article:

The opening bell has rung and here is what I see...

The broad market indices did open with a slight downside bias but this was shrugged off as all but the RUT now trade flat...networkers are taking the lead on the downside but losses are still muted...oil related stocks are trying to take the lead on the upside...


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Worth Noting

by 6/27/2005 9:26 AM
Stocks quoted in this article:

For what it is worth...While the large-cap SPX has firmly broken below it 20-day moving average, the RUT was able to hold above this level at Friday's close. This may signal that the selling pressure in small-caps is less intense.

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Into the Open

by 6/27/2005 9:20 AM
Stocks quoted in this article:

We head toward the open with the stock futures still pointing to a slightly lower open...Gold has bounced and is now only down 50 cents...oil is still holding above 60 with a gain of 56 cents.

A scan of the headlines shows, as you might expect, that crude's push above 60 and the Fed are in the spotlight. The FOMC is expected to bump rates up by another quarter point on Thursday and some are focusing on that as the big "event" for the week...

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