This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Apprenticed Investor: Stop-Loss Breakdown

On the other hand, buying a stock right above support, with a stop just below, offers good risk/reward potential. Downside is limited to a few points, while upside may be substantial.

  • Stop Below Moving Average: One of the most reliable sell signals is the 50- or 200-day moving average (MA). The MA is the average daily closing price of a stock for a specific number of days.
  • When a stock is rising, its moving average will rise, albeit at a lag. Once the stock begins to falter, its price will fall much faster than the moving average. When the share price crosses the average to the downside, that's a very powerful sell signal.

    Since the market peaked in March 2000, every major disaster -- from Lucent (LU) to Global Crossing to WorldCom -- has given clear 200-day moving average sell signals.

  • Trailing Stops: Any of the above stop losses can be turned into a "trailing stop." This strategy locks in specific profits and prevents you from giving back too much of a winning position.
  • Regardless of what your original stop loss was, you should raise it as a position rises. Each time your stock enters a new "decade" ($30s, $40s, $50s, $60s, etc.), you increase your stop loss proportionately. You can adjust the stop loss on the basis of the weekly or even monthly closing prices. This makes it more likely you'll get the benefit of a rising stock price for as long as possible, while still getting downside protection.

    When moving your stops up, it's a good idea to avoid using round numbers (i.e., $60, $70, $80), because option strike prices can temporarily "pin" a stock to those levels on expiration day each month. There's a tendency for stocks to trade to just below these levels and then snap back. For lower-priced stocks (say, under $20), try using weekly increments of $5 instead of "decades."

  • Profit Protection Stop Loss: One frustrating issue for investors is when a winning position starts reversing on them. Those profits that took so long to accumulate slowly start slipping away.
  • Select the service that is right for you!

    COMPARE ALL SERVICES
    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    DOW 16,408.54 -16.31 -0.10%
    S&P 500 1,864.85 +2.54 0.14%
    NASDAQ 4,095.5160 +9.2910 0.23%

    Brokerage Partners

    Rates from Bankrate.com

    • Mortgage
    • Credit Cards
    • Auto
    Advertising Partners

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs