Two recent trades that illustrate the absolute, table-pounding necessity of sell stops.
First China (FXI):
I went long @ 38 in December when the 20-day high gave a buy signal. I then rode it out, moving the 10-day low up in lockstep with the price until my stop was hit just below 41 in late January for a nice, easy lay-up. When FXI rallied for the next few days, it would have been easy to have regrets or think the stop was too tight, but when it failed to take out its prior high, that was a sign the stop did exactly what it was supposed to: it didn't get out at the very top (no one can do that and in my opinion, no one should try), but it forced me to take profits and limit risk.
Today, China gapped down, its fourth down day in a row after making a 2b top (failing to take out the past top actually). The stop did what it had to do.
Apple offered quite a bit of excitement over the past several months on both the long and short sides. I was not trying to catch every wiggle and squiggle, only take advantage of a few high probability moves.
I bought in August even though Apple was making a new high (no stock is ever too high to buy or too low to sell), then the trailing 10-day got me out in September, locking in a tidy little profit. To be honest, I regret not having then followed through and shorted Apple but I let the fundamental story distract me from the reality unfolding on the chart in front of me. However wonderful the company, however reasonable its valuation and high its hoard of cash, someone was selling Apple in an orderly way. An ideal trade would have shorted Apple from the sell signal at 640 to the trailing 10-day buy stop above 560 a month later but I left that money on the table. Nevertheless, you should never assume any move is over - once the trend has changed, look for an opportunity to reenter, as I did even though prices were substantially lower when I did. The gap to below 460 was a sign that prices should subsequently fall lower - substantially lower before recovering, but it is dangerous to take a position right after a gap down. Better let prices settle down a bit, as they did. After two days of weak reaction to the sell off that didn't even take Apple to the lower edge of the gap, I went short (bought puts - I highly recommend options rather than shorting the stock outright because with options your risk is limited to the price of the put and if your time horizon is short, you won't lose a lot of money in time premium wasting away). Three days later I had almost a 50% profit in the option position and Apple was approaching possible support, so I pulled the trigger and got out. It's rallied a bit higher since then to above where I bought the put but I will wait before re-entering. The point is that paying attention to stops (and also to support offered by trailing 10 or 20-day lows) can serve you very well.
First China (FXI):
I went long @ 38 in December when the 20-day high gave a buy signal. I then rode it out, moving the 10-day low up in lockstep with the price until my stop was hit just below 41 in late January for a nice, easy lay-up. When FXI rallied for the next few days, it would have been easy to have regrets or think the stop was too tight, but when it failed to take out its prior high, that was a sign the stop did exactly what it was supposed to: it didn't get out at the very top (no one can do that and in my opinion, no one should try), but it forced me to take profits and limit risk.
Today, China gapped down, its fourth down day in a row after making a 2b top (failing to take out the past top actually). The stop did what it had to do.
Apple offered quite a bit of excitement over the past several months on both the long and short sides. I was not trying to catch every wiggle and squiggle, only take advantage of a few high probability moves.
I bought in August even though Apple was making a new high (no stock is ever too high to buy or too low to sell), then the trailing 10-day got me out in September, locking in a tidy little profit. To be honest, I regret not having then followed through and shorted Apple but I let the fundamental story distract me from the reality unfolding on the chart in front of me. However wonderful the company, however reasonable its valuation and high its hoard of cash, someone was selling Apple in an orderly way. An ideal trade would have shorted Apple from the sell signal at 640 to the trailing 10-day buy stop above 560 a month later but I left that money on the table. Nevertheless, you should never assume any move is over - once the trend has changed, look for an opportunity to reenter, as I did even though prices were substantially lower when I did. The gap to below 460 was a sign that prices should subsequently fall lower - substantially lower before recovering, but it is dangerous to take a position right after a gap down. Better let prices settle down a bit, as they did. After two days of weak reaction to the sell off that didn't even take Apple to the lower edge of the gap, I went short (bought puts - I highly recommend options rather than shorting the stock outright because with options your risk is limited to the price of the put and if your time horizon is short, you won't lose a lot of money in time premium wasting away). Three days later I had almost a 50% profit in the option position and Apple was approaching possible support, so I pulled the trigger and got out. It's rallied a bit higher since then to above where I bought the put but I will wait before re-entering. The point is that paying attention to stops (and also to support offered by trailing 10 or 20-day lows) can serve you very well.
