If you’re like most traders, you've been taught
that you should place a stop on every stock trade you do. And possibly you do. But, is
it helping you make money? Or are you constantly getting stopped out only to see
the stock rise sharply right after you were stopped out of the position.
Frustrating isn’t it?
There may be a good reason why this is
happening. It appears (and you may already know this from your trading) that
stops hurt, not help your performance. Here’s why.
Larry Connors, author of How Markets Really
Work and Street Smarts, and editor of the TradingMarkets Daily
Battle Plan for Stocks (click
here for your free
trial), ran a study in which he looked at over
1.5 million trades on stocks that made 10-day lows (pullbacks) and were trending
higher, trading above their 200-day moving average. He then tested putting in
stops 3%, 5%, 7%, 10%, 20%, and 50% below the entry price.
Did these stops help further
improve the performance of these good pullbacks? Absolutely not! In fact they
hurt them. Take a look…
Larry looked at every liquid
stock that was trading above its 200-day moving average and closed at a 10-day
low (a pullback in an uptrend) for more than a decade’s period of time. The exit
was above the 10-period moving average. The first test used no stops. The other
tests used stops of 3% up to 50%.
As you can see, using stops,
no matter where they were placed, hurt the performance of these pullbacks.
Interesting the 7% stop, the level most used by traders, performed the
worse. The bottom line is no matter where the stop was placed, the performance
was lessened by the stops. And it may be why traders get stopped out so often
only to see the stock then rise to higher levels.
Here's one of many thousands
of examples of an uptrending stock that got stopped out and then reversed
higher.
Chart courtesy of Bloomberg
1.
10-day low pullback above the 200-day after a strong uptrend.
2. & 3. 1% - 7% stops exit long positions…
4. …and then a solid resumption of the trend leading to new highs.
What’s the solution? Adjusting your position
size, not concentrating too much of your capital in one sector, and knowing
where the specialists and market makers are placing their orders all provide
opportunities to increase your trading returns.
If you would like to learn more about how to
avoid getting stopped out of your positions, and learn how to successfully apply
a number of trading strategies that are backed by more than a dozen years of
quantified results, please
click here to find out more about our Swing Trading College. Past attendees have told us it’s one of the
best investment they’ve ever made in themselves for their trading.
