The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

CHAPTER 5

SELLING ON A STOP

If you compare buying a stock to getting married, using a stop is like signing a prenuptial agreement. If your happy relationship hits the rocks, the prenup will not take away the pain, but it will reduce the hassle, the uncertainty, and the expense of the separation. What if you are a happy bull but discover that your beloved stock has been sneaking out and getting between the sheets with a bear? Any breakup is going to hurt, but the best time to decide who gets what is when you still tenderly hold each other’s hands.

A stop provides an essential reality check for any trade. Yes, you love this stock. Yes, you have great expectations. But what if it doesn’t work? Have all your previous stock ideas worked out well? Or has there been one or two that did not? More than one or two? Many? Is there any doubt then that you need a stop? You need to examine the chart and decide where you want to get out if that trade starts going against you.

Even a profitable trade deserves to have a protective stop. Stops help you sell when the stocks turn against you. Some traders also like to ride runaway trends using trailing stops that follow rapidly moving prices.

Once you put on a trade, a pernicious “ownership effect” sets in, making it much harder to decide when to sell. The best time to make that decision is before you enter a trade.

Think of that old-fashioned jacket that hangs in your closet. You cannot bring yourself to throw it away—because it is yours, ...