Jim Cramer on stop loss orders–terribly wrong again! KCI soars; How I trade the 3X ETF’s
I am dumbfounded! I recently taped some of Cramer’s shows and reviewed Friday’s show this weekend. At about 10 minutes into his show, Cramer responded to a caller who asked him about the use of stop loss orders. Cramer ranted on about how he did not want his “home gamers” to put their orders on “automatic.” Stop losses, he said, were okay for professional traders but not for his listeners who are part-time traders not glued to the market, and who are not robots. I had to listen to him several times to make sure I heard what he was saying, because his advice was exactly opposite to what I think people should do. His reason for not using stop losses was that one might get whipsawed–buy a stock at 60, put in a stop loss order to sell if it falls to 59 and then have the stock fall to 58 and be sold out, only to reverse and close back above 60. But it is precisely the part-time traders who are not watching the market every minute who need to have automatic stop-loss orders. Traders who are glued to their monitors can watch their stock closely and manually sell when they want to. It is the part-time trader who get his head handed to him when his stock plummets while he is at work or in a meeting. In 2005, I lost a lot of $$$ profits when I went to a business meeting thinking I did not have to put a stop in on a very strong stock (TASR) I was holding. That mistake cost me big–the market always exacts its tuition, and we must learn from our mistakes.
I could not disagree more with Cramer’s advice. Before I buy a stock, I calmly decide how much I will let it fall before I think I am wrong and how much of a loss I will tolerate. In this way, this “home gamer” who has a full time job, does not have to be glued to the monitor like a professional trader and can go about my business knowing that if my stock falls to my sell level I am immediately and automatically sold out. Once I have my stop loss order in place, I have taken my emotion out of the trade. If the stock falls and I have taken a small loss, I can always go back in and buy it back if it shows renewed strength–now that’s smart trading! Every small loss bring me to my next big gain. It was the use of stop losses that helped the great Nicolas Darvas (see his book below) to make a fortune in the market in just 18 months. It is how one keeps his losses small.
Put this advice along side a lot of other bad Cramer advice, including calling chartists morons and recommending stocks based on fundamentals alone that were later devastated by the 2008 market decline. (I think Cramer started showing charts for a while after he found that a lot of his fundamental/value choices tanked).
So, how do I put in a stop order? Before I buy a stock I determine at what level I will have been wrong. Since I am buying the stock at what I believe is the right time and assuming that it is in an up-trend, I should not tolerate much of a decline below my purchase price. The best way to enter a trade is to assume it will go wrong, so that I can calmly prepare my risk control strategy in advance. I select a price level based on prior support, at a moving average or a recent reaction low. As soon as my buy order is executed, I place an order to sell my newly purchased shares on stop at my predetermined loss price. I typically place a GTC (good til canceled order) so that I do not have to put a new stop order in every day. A day order expires at the close each day. Now, once the stock trades at the stop price level I put in, the broker automatically sends the order in to sell my shares at the market. I may or may not sell the stock at the stop order price. The order goes in line behind other market orders and gets executed in turn at the best price offered. The greatest risk from using a stop loss order is that if the stock suddenly trades far below the stop price (as in a gap down at the open the next day) one gets only the best price that someone is willing to pay. A good strategy is to cancel the stop order after the stock has advanced enough and to put a new sell stop order in at a higher exit price to ensure I do not give back all of my profit. I do not use automatic trailing stop orders because I prefer to raise the stop price manually after carefully reviewing the stock’s technicals. If I am stopped out and the stock rises again I love to buy it back at a higher price than I sold it. Such trades often are quite profitable because during the whipsaw, as the shares decline, they are bought by others who then hold on for a larger advance. Many large advances begin after a sudden decline…….
Meanwhile, the GMI and GMI-R remain at their maximum levels. As the table below shows, Read more…
Growth stocks continue to rally; The Ultra long ETF’s, QLD and TYH beat most tech stocks again
With the GMI and GMI-R at their maximum levels, growth stocks continue to rise. AAPL continues to rise, along with PCLN, RMD, GMCR, NFLX and CREE, all of which I own. As you know, I concentrate my trading in stocks at or near their all-time highs. I also like to see good earnings trends. Some of these stocks had recent quarterly earnings increases of 100% or more. The current short term up-trend in the QQQQ has now reached 14 days. During that time, the QQQQ has increased +5.2%, QLD by 10.6% and TYH by 11.1%. In the same period, only 15% of the Nasdaq 100 stocks (and 14% of the S&P 500 stocks) rose 10% or more. Again, we find that in an up-trend, one can beat most Nasdaq 100 stocks (and S&P 500 stocks) by simply buying the ultra long tech ETF’s, QLD and TYH.
AAPL breaks out–T2108 near peak? Tech up-trend looks strong.
The market closed strong on Friday, as AAPL broke out to a new high. Technology is where the action is right now. However, one caution flag is that the T2108 is now at 81%, very near to being in overbought territory. Last May, the T2108 reached a peak at 92%. Meanwhile, the GMI Read more…
KCI–A cup-with-handle break-out?
The short term up-trend in the QQQQ finished its 6th day on Friday. I like the fact that AAPL is holding up. We need to watch the leaders for signs of where the market is headed. I went through the new highs on Friday using the methodology I described last week. In doing so, I found a stock that appears top have broken out from a cup-with handle pattern. So, I am showing it below to provide my class with an example of this important bullish pattern, described by William O’Neil in his book (listed to the lower right). Read more…
Short term QQQQ up-trend in question
The QQQQ is going back and forth over its key 30 day moving average. Time will tell whether this new short term up-trend, now in its 4th day, will hold.
How to use IBD 100 and New America stocks and TC2007 to find potential rocket stocks; Market rally begins
I am writing this post primarily to teach my students how I search for potential rocket stocks–stocks that have been launched and appear headed towards new peaks. As I said in class this week, it makes the most sense to buy stocks that have the best fundamentals and technicals. This strategy has been advocated both by Nicolas Darvas and William O’Neil in their extraordinary books (listed at lower right of this blog). Darvas, made a fortune trading in growth stocks in the late 19050’s and said that he liked to buy stocks that were trading at all-time highs and that had already doubled in the past year. So, I am going to show you how I use the great TC2007 stock charting and analysis program to find potential rocket stocks that I research further before buying. Read more…
Short term down-trend ending?
A rise in the QQQQ on Thursday and Friday will likely turn my trend indicator up. Wednesday was the 18th day of the short term down-trend. However, there were 167 new highs in my universe of 4,000 stocks on Wednesday, the most since January 21. And 53% of the Nasdaq 100 stocks closed above their 30 day averages. With the indexes up against their key moving averages, it remains to be seen whether they will break through this week. With many growth stocks getting stronger, I suspect this market is going higher. The key is to not jump the gun, however, but to wait for confirmation.
Federal Reserve raising short term interest rates? Stocks ready to rally?
While the short term down-trend is still in place, a lot of stocks I watch are gaining strength. And surprisingly, short term rates are starting to rise, perhaps in anticipation of a recovery in the economy. First, note that the GMI-R, which is more sensitive to short term changes, has risen from 1 to 5 (of 10), while the GMI is now back to 2. As the table below shows, Read more…
IBD 100 TOP TEN STOCKS GET TROUNCED IN MARKET DECLINE!
Last October, I wrote a post showing that in the market’s rise, 70% of the top 10 stocks in the IBD 100 list outperformed comparable stock indexes. Well, I repeated the analysis for the top ten stocks in the IBD 100 list published on 01/11/2010. I compared the closing price of each stock on the Friday before Monday’s list was published to the closing price yesterday, on 02/09/2010. I am a big fan in buying IBD 100 stocks in a market up-trend, but was still very surprised by these dramatic results. Read more…
More new lows than highs; T2108 and stochastic in oversold territory
For the first time since early November, there were more new lows than new highs in my universe of 4,000 stocks on Friday. Furthermore, the Worden T2108 indicator is getting near the level (below 20%) where declines sometimes end. Friday was the 11th day of the current QQQQ short term down-trend. We are either at the beginning of a major decline, or near the end of a short term correction. The best course for me is to wait for the market to tip its hand. The GMI remains at Read more…
