Another entry in Quint Tatro’s “Becoming a Better Trader” series, this one on using stops:
One of the questions I receive often when we go through a poor market environment is how I was able to sidestep much of the carnage. My answer is quite simple. Markets don’t get terrible over night. They typically start to act poorly before the real selling kicks in.
By watching your underlying positions and adhering to a strict stop loss discipline, you will immediately be selling stock and raising cash when your individual stocks start to break down. When this happens, my stocks are cut and very quickly my cash level starts to grow. As the market continues to wane one by one my stocks are cut as they cross their lines of technical health and most of the time, I have raised cash taking only small losses while sidestepping the true carnage that is coming. You see, most people who suffer significant losses do not cut stocks quickly. Rather they adhere to the buy and hold mentality and ride the stock all the way down for a terrible loss. Finally, when the stock is done going down and becomes lifeless, the trader decides to cut the stock and is now faced with a very large loss to make up. These losses are very hard to recover from and often significantly damage not only the trader’s financial capital but emotional capital as well.
Rather than fall into this trap, adhere to a basic stop loss rule and save yourself the headache.
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