One thing that you will see me talk about fairly repetitiously if you read this blog over time is the necessity to avoid losses. While so many people focus on making gains, I firmly believe that avoiding losses, especially big ones, is an equally important element of long-term financial abundance. One way to do this is to use stops (correctly, a stop-loss order). A stop is a sell order that will automatically sell a losing security or investment at a predetermined price thus preventing your loss from growing. In its investor education, Investors Business Daily is adamant that investors should set stops no greater than -7% to -8%.
Another way to limit downsides is to set alerts using Marketclub’s trade triangles. These give us buy (green) or sell (red) signals. We use the long-term monthly trade triangles to direct our Simple and Conservative portfolios. Members may set an automatic e-mail alert to notify them of a red or negative trade triangle. This would be a signal to close a position if we were using the trade triangles instead of a stop-loss order. However, you do have to have the discipline to follow through and sell the offending investment yourself.
If we’re honest I think we’ve all held onto a losing investment in the hope that it will “come back”. This is an example of why that is an altogether bad strategy:
This is a chart of Constellation Energy Partners LLC. I came across it while doing research on another project If you had been holding CEP in the hope that it would come back from its high of ~$50 back in 2007, you’d be a bit frustrated by now. A stop-loss, or, as you can see from the chart, the red monthly trade triangles would have saved us from ourselves quite effectively.
We’ll have more on stops in future posts, their uses, abuses and limitations, but the take-home is you HAVE to limit your losses.
We had a great day in the market today. Dow up 109 points with the NASDAQ up over 1% and the S&P up 0.58%. But, gains aren’t being spread evenly throughout the market, and, I’m not sure one day’s reversal is going to break the negative trend we’re in at the moment.
I had two red weekly trade triangles hit today from Marketclub. One in KOL (Market Vectors Coal ETF) and another in EEM (iShares MCSI Emerging Market ETF) KOL left me with a 7% loss since 1/13, so it’s definitely time to get out of this position for now. William O’Neil (the publisher of Investors’ Business Daily) has it right when he says that your stops on new positions should be HARD at 7-8% to the downside. Let’s remember that part of our Paladin philosophy is to limit losses so they don’t outweigh our gains. So, I’ve set up limit orders on KOL and EEM to sell at the open. I will replace KOL when market conditions look right, EEM too.
I also had a repeat red weekly in IWM ( iShares Russel 2000 Index ETF). Actually this trade triangle first popped up on 1/20, don’t know how I did but I missed the alert. As today’s close was above the trade triangle alert price I’ll just be keeping an eye on this ETF. I have to say the MACD is not looking too encouraging and I may just set a Trade Trigger to sell at the trade triangle price on TDAmeritrade. I’m sitting on a nice profit in IWM and I don’t want to see it whittled away.
OK, so Marketclub is slinging some red trade triangles my way. What’s Vectorvest’s point of view? VV is also calling for caution. Their composite price on the stocks they track is down over the last week, so as VV puts it, the primary wave is down.
What does this mean to you? Even if you don’t use stock services like Marketclub or Vectorvest, you should be seriously thinking about your stop positions to protect profits or limit losses. If you’re not sure how stops work, we’ll review them in an upcoming post.