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3 reasons not to use Stop Loss – answer to Jon Trausti’s question about Free Stock Strategy May 28, 2012

Posted by deminvest in investment, nasdaq, stocks.

Dear Jon, thanks for your very good question about Free Stock Strategy :

Dont you ever use “Sell Stop” for stocks you buy? … for example, many suggest you always use 5% “sell stop”.. or 10% .. and just buy some other stocks, if the ones you bought are not going in the direction (up) you hoped/wanted ?

It is for 3 reasons

Reason 1)

The only way to make money on the stock market is to buy low and sell high.

Most stocks move together up in good times and down in bad times. Automatic stop loss results in forcing to sell a bunch of stocks, even good ones, as the market sinks.

With my strategy, I have to buy every month, even when markets point down. In bad times I can hardly sell any stock because they can’t hit “up 40% target” in bad times.

As soon as market recovers most stocks that I buy in bad times hit my 40% up target and I make money.

What I accomplish that way is buying low and selling high. The best think is that I do it automatically, without having to understand or forecast what is going on in the Economy.

S&P 500 and NASDAQ 2002 to 2012

If we look at the last 10 years, we can see that if I had bought every month and if I had a stop, I’d have  sold with a big losses every stock the next month in 2002, 2007 and 2008. Without stop losses I was just buying a stock every month in 2002, 2007 and 2008, when they cost about half the price they have now. With my strategy I sold a lot in 2004, 2007, 2011, because stocks were doubling up, making it easy for me to reach my 40% target on most stocks. What is great it that happened by itself, without any need to be an Economist or a financial analyst.

Reason 2)

I don’t trust banks, traders and markets. In the short run they can manipulate a good stock and send it down 10% to take advantage of your stop loss and buy cheap. They did tricks like that several times lately and they blamed “computer mistakes”. I wrote about those dirty tricks here

Reason 3)

I have the ability to invest $1500 every month. I hope I will not be forced to sell. I  sell to make more money, not because I do need the money. This is the only way to execute free stock strategy.


1. JTS - May 28, 2012

Thank you for this good answear deminvest,

I understand, and it is true, stocs tend to go up and down many times before climbing eventually very high.. so stop loss will cost alot in trading fees.

My stock story (in short):

Around the year 2000 I sold my house here i Iceland, and went into stocks, using the only cash I owned then, around $40.000 (then).

First I bought good stock here in Iceland, but I did not have patience and sold (better had waited few mounths)..

Then I went into daytrade, and finnally paid my self into a group where there where “Stock Watcher” and it costed around $500 to be in the game. His task was to find stocks and we (closed group) would buy and sell as he told us. Sometimes we lost and sometimes we profit. I did not follow every rule he had set, and I did let my emotions run wild… many times… ( He told us to not to think of the stocks as monney, but as units, to take out any feeling of loss ).. Smart, but I could not do it.

To make a long story short, I was going to learn to Option Buy whe I only had about $10.000 left.. I had been trading stocks for about 2 years and was burning my monney.. I bearly got out with $10.000 and was very badly burned ( It took me several years to get over this mentally )… And I told my self, I will never do this again.. or at least not unless I had learned how to do it.

Now Im in a different place, I run a company and have for about 8 yeras and I would like to Invest.. I think your strategy is very interesting and the only thing that stops me now are the laws here in Iceland they passed on during the last years crises. So now I cant move monney out of the country to buy stocks.. :-/

Well.. thats all, just wanted to share my experience.

best regard,

2. deminvest - May 28, 2012

Thank you for sharing your experience Jon.

I have also made many investment mistakes. I even have a category on this Blog about them:

The most comical of my mistakes was New Century Finanacial a company specializing in Subprime Mortgages Which went broke first as the subprime mess came out, causing me a 100% loss on that pick.

What saved me was my monthly approach. Worse damage a mistake could make would kill one month of my saving.

One question: can’t you invest on US stocks using an Icelandic bank account?

3. deminvest - May 29, 2012

Dear Jon,

have a great time on Spain beaches!

You found one of my weaknesses. I have not yet decided a rule about this. In my experience:

* buying more shares of the same stock when it goes down is bad. I lost lots of money that way with BIDZ, Blockbuster, Renren, RIM and others

* buying more shares of a good stock, like Google, can be a good move only if it goes down because the broad market is going down.

I wrote a post about it.

As a general rule, it is not good to buy anything BECAUSE it is going down. If it is going down there may be a reason I don’t know. Also a stock can go down for weeks, months or years, but there is only one day in which it hits the minimum. There is little chance to catch that day.

Some investors say that buying a falling stock is like catching a falling knife. It is better to pick it once it has fallen on the ground:

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