This column was originally published on RealMoney on July 27, 2007 at 11:30 a.m. ET. It's being republished as a bonus for TheStreet.com University readers. For more information about subscribing to RealMoney, please
Different Risk Profiles, Different StopsIn applying this logic, you are saying that a stock such as Procter & Gamble ( PG) has the same risk profile as, say, Baidu ( BIDU). That's surely not the case. An 8% decline in Baidu would be much different from a similar drop in P&G. Declines of that magnitude happen quite routinely with Baidu -- and much larger, actually -- but rarely happen for P&G. Because 8% declines happen so frequently with Baidu, 8% is too tight a stop; you'd get stopped out of the position soon after entry, and possibly before your entry point had time to pay off. If a 2% decline in P&G is not a worry, and something that small shouldn't be, perhaps a 10% decline in Baidu shouldn't be a worry, either.
| A Hazard in Risk |
P&G's risk profile isn't the same as Baidu's
|Click here for larger image.|
|Source: Yahoo! Finance|