I notice you advocate 7-8% stop loss orders after purchase. As the position works out do you recommend adjusting the stop loss to maintain the 7-8% or something else?

Absolutely. Let’s say we buy a stock on a breakout. We will put in our stop loss at 7% or 8% below where we bought the stock. That is automatic when we enter the position. Then the stock starts to run up. If the volume is strong and the stock is really climbing, we move the stop loss up to either just below the breakout, or if the stock is flying up, we move it up to some support level such as the 10 day moving average. Now we know that some stocks, indeed most, test their breakout to some degree, and we have to decide whether we want to take profits after the first run is complete or if we want to move the stop up to just below the breakout to let it come back and test that point.

On options we often go ahead and take some profit on our positions if not all of them, and then try to catch it as it starts to move back up on the rebound. We can even do that on some stocks if we are not too sure of the market. When the market was moving up on low volume, that was a classic case. Moves looked good, but this run from the bear has given us many breakouts that failed along the way. Taking profits on a 20% move is not a bad plan of action when the market is not continuing to show good, consistent upside action (e.g., low volume gains, higher volume selling when it occurs). Setting stops is very subjective as investors enter positions at different levels. In this market we have been inclined to follow the move up with stops at points we feel we will not be taken out in intraday volatility, e.g., at the previous day’s low. If we are really concerned, we will just sell the position and move on. Right now, we would rather bank 10% than get stopped out at our buy point after a stock had moved up. We just missed one of those on AZPN, and are still mad about that. We sold at the breakout instead of taking a 12% gain on the stock.