Printed with Recommendations
Stock Traders Press has added a new feature to its short-term
research report: stop prices. The stop prices are listed
in the heading of each new recommendation right after the
recommended buy price and the target price. This is the
price our research team believes a client should exit a stock
if it declines below our recommended price. The stop prices
are based on either a percentage decline or a support level.
Percentage based stops can be adjusted by clients if they
picked up our recommended stock above or below the recommended
buy price, but support based stops should be held steady regardless
of what price a client gets the stock. Support based stops
will be noted as such.
Most traders and investors don't
use Stop Orders, but is this wise? Stop Orders can help
an investor increase their returns, stem their losses, and
reinforce the mechanical aspects of their trading strategy
rather than being pulled around by their emotions. The logic
behind the use of Stop Orders is simple: cut your losses to
preserve your capital. Investors often overlook the fact that
if the value of their investment declines it takes a greater
increase to return their account balance to where it started.
A small loss requires a slightly larger gain to be even again,
but a large loss requires a Herculean gain just to get back
to even. Most investors kill their chances of great returns
by not stemming their losses. They're just fighting to
get back to where they started. A 10% decline requires a nominal
11% gain to get back to the same level, and a 15% decline
requires an attainable 17% gain to be even. A 20% decline
requires a fairly large 25% gain to just get back to even,
and if an investor lets an investment slip 25% then they need
a 33% gain to get back to where they started. Most investors
are looking for a nice two or three digit return on their
investments, not just an account with the same starting balance.
There are four primary types of Stop
Orders: brokerage firms offer two and two reside in the trader's
head. Not all brokerage houses allow the use of all types
of stop orders so check with your firm to see which stop orders
they will let you place. A standard Stop Order is placed below
a purchase price and is triggered when a stock declines to
the specified stop level. A standard Stop Order becomes a
market order when triggered, and will be executed at the prevailing
market price with there being no guarantee of the price received.
Stop Limit Orders turn into a Limit Order when the stop level
is reached. With the Stop Limit Order the minimum execution
price is known but in fast trending markets the prevailing
price may be below the selected limit price and the sale may
not get executed. The third type of Stop Order is the one
manually calculated by the investor when they enter the position.
The secret is to actually act on the mental stop when the
price is reached. The fourth type of stop is a trailing stop.
This is actually one of the stops offered by brokerage houses
that is manually moved up below a profitable position to hold
on to gains. Successful traders will use their stop of choice,
limit their losses, and keep their capital in the most productive