Invest and Trade Profitably with Jon Johnson

Please advise if your use of stop loss orders are for the closing price (the closing price is below the stop) or are in place to be triggered at any time the price falls below that stop.

August 30, 2000

Very good question. In most instances we use what we call soft or mental stop points. That is, in most situations we do not set a stop loss order into the system but instead keep up with the stock’s trade during the day. The reason we do that is even though stocks have definite support levels, those can be undercut intraday. We establish stop points below those levels in order to eliminate as many false alarms as possible, but the market trades on emotion and it almost always overshoots the mark. Thus you can see the support but then a stock will undercut it intraday on an emotional selling binge and then make a dramatic recovery. If you have a stop in the system you can get a poor trade just to see the stock rebound.

Thus, we tend to view stop points on the close as opposed to intraday. If has stock has tested below the stop and then rallies back close to support we will let it ride to see if it can recover. If a stock breaks support or a trendline and is going to close below it for a session but is otherwise a strong performer we will give it a day to recover. Stops are guidelines. They are like good teenagers: they are usually good but sometimes they get a bit unruly just to come back in line. Give them a little rope to come around as long as the market is behaving as it should. If they don’t do so you drop the hammer.

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