| If you follow my articles or my stock analysis, you | | | | Since Tower Group (TWGP) is currently on the MSW |
| already know that I am not a supporter of physical | | | | weekly screens, I will use it as a perfect real time |
| sell stops due to the fact that market makers can | | | | example. Below are the open, high, low and closing |
| manipulate these stops during the day. A market | | | | prices for the past two days in Tower (the stock |
| maker can drive the price down artificially during | | | | has not reached an intraday low below $16 in the |
| trading hours setting off physical stop after physical | | | | past several weeks). |
| stop only to allow the stock to rebound and close | | | | Monday: 19.64 open, 19.81 high, 18.53 low, 18.87 close |
| for a slight loss or a possible gain. The market | | | | Tuesday: 18.86 open, 19.02 high, 15.37 low, 18.49 |
| makers that drive down the price are the same | | | | close |
| individuals that grab shares at the new intraday price | | | | As you can see, the stock went as low as $15.37 on |
| lows, giving themselves an instant profit at the | | | | Tuesday only to close back up at $18.49 (a gain of |
| expense of investors like you and me. I fell victim to | | | | 20% from the intraday low) but what you cannot |
| this trap several times in 2002 and 2003 and became | | | | see without an intraday chart is the fact that this |
| very angry at my stock system until I understood | | | | entire move took only 90 minutes of the trading day. |
| what was really happening. I had established positions | | | | Within minutes of the opening bell, the stock dropped |
| in stocks and set a physical sell stop about 7-10% | | | | 20% but rebounded with strides over the next 90 |
| lower to protect from a larger loss. I would come | | | | minutes bringing the price back to the $19 level. From |
| home or take a break only to see that I was | | | | that point forward, the stock gradually fell and lost |
| automatically sold out of the stock due to a brief | | | | about 2% for the day but it wasn't anywhere near |
| drop that only lasted a few minutes to a few hours. | | | | the 20% drop from the first hour of trading. If you |
| The stock would drop anywhere from 15% to 25% | | | | had a physical stop near $18, a short term support |
| intraday only to rebound for a small 1% or 2% loss. | | | | level, you would have been sold out even lower |
| In one case, my stock that had been sold out | | | | during the intraday drop and would have a large loss |
| intraday actually managed to close the day with a | | | | in your portfolio. If you had a mental stop, you would |
| slight gain, really making my emotions rage. This same | | | | not have been sold out and could have made a |
| stock went on to double over the next nine months | | | | rational decision on Tuesday night to see if you |
| but I never had the courage to get back in. I took | | | | would like to sell the next day because your mental |
| this anger and quickly converted it into a research | | | | stop had been violated. The stock managed to close |
| effort that would help me understand what had | | | | above $18 per share but a major red flag was issued |
| happened and why it had happened and most | | | | and in most cases, I would sell the next day to be |
| importantly: What can I do to prevent it from | | | | safe. I would then wait after selling the stock to see |
| happening to me again? | | | | what direction it was going to take and if the |
| I started to study the three instances where this | | | | up-trend would continue. If the up-trend continued, I |
| action happened to me and I researched other | | | | would jump back in at the first solid opportunity. |
| stocks that I did not own but showed the same | | | | Some investors think I am raising my risk without |
| type of false intraday movements. After reading | | | | using physical stops but I know I am helping my odds |
| about market makers and my individual research, I | | | | by assessing the situation at the end of the day by |
| came up with a solution to the problem. If I | | | | placing mental stops. I only place physical stops on a |
| narrowed down my portfolio to only high quality | | | | position that is showing at least a 20% gain and I will |
| stocks, both fundamentally and technically, I knew | | | | give it room to breathe. If the stock shows a 50% |
| that my risk was low enough to withstand an | | | | or 100% gain, I will place a physical trailing stop to |
| intraday movement without placing a physical stop. | | | | protect my gains from melting away but I will not |
| Barring a catastrophic event, I felt comfortable | | | | place a physical stop on a stock that I just |
| enough to set a mental stop in my head and write it | | | | purchased. Too many times during the initial stages of |
| down on a piece of paper so I could review the stop | | | | a breakout, market makers will wipe out all of the |
| after the day's close. If a stock I own drops below | | | | physical stops and restart the movement without the |
| my mental stop, I will either sell "at the market" first | | | | heavy domino load below. These market makers |
| thing the next morning or I will wait for the first hour | | | | know about CANSLIM and other stop loss systems |
| of trading to end and then make my decision to sell. | | | | and they can see where these stops are placed; so |
| If the mental stop has been passed by more than | | | | they wipe them out, allowing themselves to get in at |
| 5%, I sell immediately the next day. If the metal | | | | a lower price and they release the possible sell-off |
| stop is only sliced slightly (less than 2%-3%) I will | | | | due to hundreds, if not thousands of stops that have |
| hold until mid morning or early afternoon to sell my | | | | been set due to a specific system strategy such as |
| shares. | | | | CANSLIM. Unless you are investing in high quality |
| Typically, when a stock violates a mental stop that I | | | | stocks with strong fundamental and technical ratings, |
| set; it will drop even further during the first hour of | | | | do not employ this strategy or you can lose your |
| trading but will then rebound as the day moves on, | | | | entire trading stake. The strategy is a suggestion |
| allowing me to take a lesser loss. This is risky but it | | | | based on the results it has given me over the past |
| has been a plan that I have been following for two | | | | several years after the bad personal experiences |
| years with success. | | | | that I had with market makers in the past. They |
| The other more important advantage that mental | | | | may burn other investors, but they no longer burn |
| stops give over physical stops is the prevention of | | | | me - only I can burn me! |
| getting sold out intraday during a false breakdown. | | | | |