What’s the most important aspect of setting effective stops? The answer might surprise you. (December 04, 2017)


In this video let’s look at Corcept Therapeutics ( NASDAQ: CORT ) and this is why: This is a company with a really, really strong growth profile with respect to earnings and revenue growth; so I like this. It has been drifting kind of sideways. It hasn’t really been too great but I haven’t been dissuaded from liking this stock because of this: Essentially the stock has been in this uptrend and I have been looking at this as this zigzaggy pullback. A little bit of a squeeze in a downward direction; just looking for a move higher, to give me an indication that this has the pause that refreshes a couple months. Then the stock is making another leg higher.

Now, definitely late on this, look at the range here, $3.00 back just in 2006 and you can see the kind of move it has made so far this year; up 150 percent or so. This is why I am showing this stock today: Because earlier today, like first thing in the morning, I mentioned (in the forum) Corcept ( NASDAQ: CORT ) was breaking out. Look at this level here, 18.50, right? We will look here. The stock was coming up here, just a continuation of Friday’s move up about here. Just starting to push up against the 50-day moving average. All systems are go, you know how strong the market was, but then the stock started to turn over. At the same time, of course, we get this gap and crap in the market ( NYSEARCA: SPY ) just in general. You can see on the QQQs ( NASDAQ: QQQ ) here that we did.

So we will go back to Corcept ( NASDAQ: CORT ). I had said, in the forum, that this was a good buying opportunity the stock is moving higher. Somebody bought and then later on, a while ago, just mentioned (I don’t really think it was a complaint because it was a very small position to start with) but just a question, “The stock is down 10 percent from where I bought it, what is up with that? What do we do?” So it got me thinking about a lot of different things, one of which is stops.

Of all the questions that I am asked about through the years stops is the most prevalent one by far. Probably the only other question that is more prevalent is, what stock do I buy? I want to talk about stops a little bit now. The deal is, it is probably going to be a few weeks but I am going to put together a little tutorial strictly devoted to stops. One of the things that is the biggest issue with stops is this: It isn’t where you place your stop that is the most important. It is where you buy the stock that is the most important. If you are not buying the stock right then you are not going to be able to place a high probability stop. What I mean by a high probability stop is actually the probability that you are not going to get stopped out but if you do you are not losing a lot of money. In other words, your stop is well defined.

Let me get to Corcept ( NASDAQ: CORT ) here. The deal on this was if you are buying on a breakout the whole reason that you are buying here is that you think (this is 15minute chart) that Friday’s move into the close is going to continue today. So what you are doing is, you are setting a stop where ever it is that you set it, this is 113.00, this is 115.00 so clear down here is just 2 percent, you are not really risking a lot. You can be buying the stock here at 115.00 or 116.00 and keep a stop even down below Friday’s intraday low and still be okay.

What you are doing is, you are placing your stop based on your analysis of the stock, your hypothesis for the stock. If the stock is under buying pressure then it will continue to move higher. If the stock is not under buying pressure then it will reverse and go lower. And so we draw a line in the sand somewhere for where we know whether it is under buying pressure or not. With the overall market, as it was today, when this stock started trading lower you knew that the stock was not under buying pressure; it was actually under some selling pressure. The moral of this story is, make sure that you have your stop in place before you do something, before you buy a stock. If you do that this is what is going to happen: you are going to be in fewer trades.

This happens to me all the time every day, multiple times a day only it just doesn’t take too long. As I am considering whether to take a stock, either long or short, then before I hit the button I am looking at where my stop is. And there are so many times that I look at where I am trying to find the place to set my stop and ultimately I realize, what the heck am I doing here? I am guessing. The stock is too extended so where am I going to set my stop? Am I going to set it here? Am I going to set it here? Am I going to set it here? What does that tell me if I get stopped out? If the answer is like it really doesn’t tell you anything other than you lost money then that is a problem; there is a problem with that trade.

This is probably the most common thing that I see in our members, Stock and Option Market Mentor members; just listen to me and watch what I am drawing, I am not really going to use this chart and I can’t find a stock that fits the exact format. Let’s say for example, that the stock is squeezing, it is right in here. The ideal time or place to be buying this stock would be if it fell back down close to the bottom and then you can set a logical stop just a little bit below this level.

By the way, kind of like you would have been able to do with Microsoft ( NASDAQ: MSFT ). A tight squeeze and then you set a stop, you are out today. Or, you can set a stop, again, we will go back here to where this was, a tight squeeze and we got the stock oscillating around in here. You didn’t buy it down here so you are buying it right when it just starts to break out. And then rather than putting your stop down here because you are buying the breakout kind of like we would have been doing with Corcept ( NASDAQ: CORT ), you buy the breakout and then you put a stop here. You don’t need it all the way down here because you are buying a breakout. If the stock falls back to here, well you knew before it fell to here that this was a failed breakout so you set it a little bit higher.

What happens with newer traders is, you chase a stock and you buy it up here. And then because you bought it at a high price and you know you did, you chased it, you set your stop here. The stock pulls back, you get stopped out. You are frustrated but okay, whatever. Then the stock rallies higher and you say, “Well shoot, I was right in the first place.” So you are buying the stock back here and you are setting a stop here. And then of course as soon as you buy it the stock falls back, clips you, and gets you out again. Then the stock rallies again, you don’t believe it. And then you do buy the stock up here. You set your stop here. And then this is what happens, the stock falls back and you are stopped out. What happened? Well, you could do this as many times as you want until you have lost all your money and then you can’t do it anymore. But it didn’t start with where you placed your stop. It started with where you bought the stock.

So my strong, strong suggestion to you is this: If you see a stock and you miss the entry, you miss the opportunity to buy it at a good low-risk, defined risk buy point, don’t chase it. Just decide that you are going to look for a different opportunity. If you can’t a different opportunity don’t go back to the first one. Just say, “I can’t find a better opportunity. I can’t a different opportunity. Maybe I will go to the gym a little bit earlier and workout a little bit more.” So I want you, when you are thinking about stops, to focus on your entry first. If you can do that then that will help you set more of a logical stop. And if you can’t do that, then you shouldn’t be making the trade.

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