THE ALCHEMIST                      by AL THOMAS

 

         HOW TO PLACE STOP LOSS ORDERS

 

            We have established why a stop loss
order is a requirement for the successful
investor. Now let’s look at some of the simpler
methods.

 

            There are 3 basic methods (and many
more we will not discuss here) for stops that
almost anyone can master. They are percentages of
the price action, moving averages and support
areas. These cannot be covered in detail here, but
you can do further research on your own.

 

            Any stock, fund or Exchange Traded
Fund (ETF) you buy you think is going to go up,
but there is the chance that it may go in the
other direction. The stock you buy is $50 per
share. You certainly don’t want to hold it while
it goes to $25 or $10 as many did in 2000. Your
first thought should be how much am I willing to
risk if I am wrong and that is called your loss
limit. Let’s pick an arbitrary amount of $5.00 per
share. That’s 10%. If it goes down that is the
maximum amount you will lose and you still have
90% of your money remaining to find a better
investment. When it goes up you will want to
protect your profit by moving the stop up.

 

            When an equity advances to $55.00 your
stop of 10% should be moved to $49.50 that is 10%
0f $55. When it goes to $60 your stop is now $54.
Nothing complicated here. There have been many
stocks that gone from $20 to $250 and then down to
$2.00. Think what a stop loss would have done for
you in that case.

 

            As I have said before never buy
anything unless it is going up. That same $50
stock was moving steadily higher in a rather
narrow trading range. If you decide to use a 20
day moving average you will have to do the
calculations either daily or weekly. You add up
the closing prices for the past 20 days and divide
by 20. This should be done once each week and the
number calculated is your stop loss. Again nothing
complicated. The steeper the advance the shorter
should be the number of days for the moving
average. If you are lucky enough to have one of
those skyrockets you might even be down to a 5DMA.
Some traders use a 50 day MA and others even a
200-day MA. Mutual funds lend themselves to the
latter,

 

            Finding support and resistance points
requires a more sophisticated approach. This is
something you are going to have to study. There
are many places on the Internet that have short
explanations with examples of how to determine
these points.

 

            Briefly you watch a stock, fund, ETF
run up and then you see it stop and set back like
a stair step. It will rest for a while with a
short up and down sideways pattern that forms
before the next move higher. Your stop should now
be down at the point the recent up move started.
When it advances again this current formation
becomes the stop loss point. This is not
mechanical and requires a more experienced trader
to determine these points. Once you learn this
technique you will also begin to see the
orderliness of the market.

 

            The mastery of an exit strategy with
stop loss orders will immediate put you in the top
10% of all investors. Learning how to sell is the
key to successful investing.

 

F*R*E*E investment letter www.mutualfundmagic.com
Author of best seller "IF IT DOESN'T GO UP,
DON'T BUY IT!" Never lose money in the market.
Copyright 2004 Albert W. Thomas All rights
reserved.Former 17-year exchange member, floor

trader and brokerage company owner.