This Day On The Street
Continue to site
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

Stop and Think Before Using Stop Losses


The last problem I see with stop orders is the stock selection aspect. At some point in your stock-picking process, you had to decide which stock of say, two was the better choice.

So if the "better choice" goes down 8%, are you automatically going to buy what you previously thought was second-best? I sure hope not; remember, you've got to check your first-choice stock's risk profile, put its decline in context and be aware of the possibility that it's at bottom.

Tailor Your Strategy

I'm not saying that stop orders should be avoided; quite the opposite. Stop orders can be very useful, if you understand the limitations of this type of exit strategy and don't use them in an arbitrary manner.

I am all for having exit strategies. Just tailor each exit strategy to the specifics of each stock; a utility stock should have a different exit strategy from a biotech stock.

Also, know the reason you want to sell each stock you hold; that should be factored in to your process. For example, if you buy a stock because it is a proxy for a foreign country but it fails to correlate with that country, you probably want to sell. Or if you want a brokerage stock, you go through the process of narrowing down the field of possibilities to what you believe is the better choice. If your first choice proves wrong (and you've of course determined during your selection process what would make it "wrong"), it behooves you to sell and switch to your "second choice," or even to switch sectors.

The possibilities are endless. If you're going to manage your own portfolio, you need to be willing to adapt the manner in which you take defensive action.

This column was originally published on RealMoney on July 27, 2007 at 11:30 a.m. ET. For more information about subscribing to RealMoney, please click here .
At the time of publication, Nusbaum had no positions in any of the stocks mentioned in this column, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.
3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $95.18 1.64%
FB $117.43 -0.96%
GOOG $692.36 -0.84%
TSLA $232.32 -3.92%
YHOO $36.01 -1.42%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs