Using Stops

I received a great comment from an Investor Village Poster about the use of stops. As you may recall, I was stopped out of TIE last week and stopped out of BTJ this week. His comment was that both stops seemed fairly tight and if I was planning to set them so tight, then I should have just sold the stock at the time that the stop was initially placed. This is great advice.

For stocks that are volatile, not using stops is my preferred method. Stops do not consider the price action and volume and you can get stopped out just when the stock is set to snap back from exhausted selling, thereby cashing you out at the lowest point of the day. However, when I am out of touch with my portfolio, I don't want my golf game to cost any more than what I am betting on the golf course.

Therefore, the use of stops can be prudent, however, the volatility of the stock needs to be considered. A 2% stop on TIE or BTJ is usually too tight for these stocks and a 5-8% stop is probably the way to go. However, I break these rules when I see key technical support points between the current price and my preferred stop price.

In the case of TIE, I was not seeing the volume needed to break upward resistance and was therefore on the fence about where the stock was going. The key support was just below the current price and I was willing to leave a little on the table (with a stop in place) in the hope of the stock getting some legs beyond $35.50. The risk/reward looked favorable at that point. If TIE broke through $35.50, then it was likely to go much higher. If it broke below $33.90, then it was likely to go much lower. I therefore set my stop at $33.80 thinking that I would be out of the way of any computer program buys that may help the stock recover at the $33.90 key support level. I think that the stop served me well here, even if I sold a little lower than when the stop was applied.

With BTJ, my stop at $42.00 was too early and too tight. There was really no support at $42.00 so a lesson was learned there. I really didn't expect the stock to fall back like it did later in the day, thinking that the technicals were solid. By placing the stop, I was just determined to lock-in my profit. In hindsight, selling instead of placing the stop would have been smarter.