Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

SNAG MANAGEMENT (STOP-LOSS)

Snags in fly fishing are inevitable, especially when fishing the bottom with weighted nymphs. Most snags can be prevented if you're on your toes and remain attentive to the feel of the fly bumping the rocks on the bottom. Nevertheless, you occasionally hook terra firma. Good, patient management of such a situation can often save a tippet and fly for the next cast.

Unexpected things occur in trading, requiring the safety of a stop-loss. I believe that a good stop-loss begins with a good entry. A good entry begins with good stock selection—matching the hatch, if you will. The majority of the time, this will determine whether your stop-loss is exercised or not. In the event that the pattern changes and you need to pull the “rip cord,” use the following guidelines. Specific, strategic locations for stops are detailed in Chapter 8 under the explanations of each strategy. Here, however, are some additional aspects that should be considered for stop placement:

• Large-cap/small-cap stocks. On very liquid stocks, I actually enter the stop-loss order GTC. On thinly traded stocks, I often place a mental stop, or what is commonly referred to as a soft stop. This requires careful monitoring and great discipline to actually follow through with the order when the requirement is met.
• Amount. I don't like a stop that incurs more than a 2.5 to 3.5 percent loss. This may necessitate altering my entry point, which is preferred over raising or narrowing the stop into the ...