LarryCan stops depress returns? You bet, and that's a problem if you have a perfect system.

If you don't have such an approach — and feel it might be to your advantage — to not wipe out your account (been there done that, it is depressing) then stops of some sort are the only tool at a trader's disposal.

[A blog referenced by a reader] so stupid and upsets me so much — geez these guys will insure their house but not protect a trade… it takes only one — just one — trade to kill you; the loser you held.

Happy trails to all.

Dr. Williams is the author of The Right Stock at The Right Time, Wiley, 2003

Bill Rafter replies:

Dr RafterPermit me to play Devil's Advocate, and in the process insert philosophy into the exercise of making money.

Some people use stops because they cannot decide when a trade has gone bad. That is, they admit that they cannot forecast the future of that trade, so they put a stop on it, solely to save money (or so they think). However the very act of doing so is in fact a forecast. Thus the conflict: they know they cannot successfully forecast, but they forecast anyway.

Other people use stops and place them at particular points specifically because they know that statistically if the price goes to point A, the odds are very small that it will revert.

My contention is that the latter person will be successful and the former will not. Thus I encourage those who use stops to question themselves as to the reason for the stop.

Our own situation is illustrative of knowing your weaknesses and circumnavigating around them. We know that we cannot forecast individual asset prices. We get reminded of that daily. Consequently we never use stops. We can however forecast the outcome of a basket of assets with some reliability. Many have been the times where we lost say 20% in an individual stock, but redemption has been found in the basket.

Dr. Rafter is the author of The Moving Trend, TASC, 2002


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