Chapter 1
Stop Losses

Don’t trade without a stop loss order.  Let me make that a little more clear.  Absolutely, positively, under no circumstance whatsoever will you ever place an order without placing a stop loss order with it.

Call your broker and ask them how to do it on their platform. Most brokers have “OTA”, One Triggers Another, which will place your order and your stop loss order at the same time when the order is executed.  If you’re trading futures, use “bracket orders” that will place your stops and exits once the order is filled.

Let’s talk a little about stop loss orders. Stop loss orders protect you from swings in the market but more importantly they protect you from yourself. One of the hardest things you’re gonna have to do in the market is to take a loss. Stop loss orders make it easier and absolute. If you move your stop loss order after placing it you might as well not use one to start with. Let’s say you buy 100 shares of a stock that’s trading at $50 a share. That’s $5000 of your money on the line ! You think the stock is going to $75 because you heard some analyst on TV say it was. Heck, that’s why you bought the stock in the first place, some analyst on TV said it was a “buy”. Let me tell you something about analyst; they don’t know the difference between bull shit and apple butter. The stock market is a rigged game and analyst are a big part of the game. Don’t listen to analyst, got it ?

And why were you watching CNBC or Fox Business to begin with ? Because you were looking for a good tip ? Tips are for waitresses, TV is for entertainment, remember that. Have you ever noticed that 90% of the “talking heads” on the “stock shows” are hot babes ? They didn’t get hired for their knowledge of the stock market. They got hired because of T&A. Ok, so no watching CNBC or listening to analyst.

So, you have $5000 invested in a stock. You bought it at $50 and today it fell to $49.50. Not big deal, you’re down $50 but you just know that it will move up tomorrow. But it doesn’t. The next day it’s down to $48.75 and now you’re down $125. Still no reason to worry, right ? It’s only a $125 loss and the analyst said it would go to $75 ! Heck, you’ve already done the math in your head. Buy at $50 and sell at $75, that’s a profit of $25 multiplied by 100 shares = $2500. Wow, you should have bought 500 shares. To heck with 500, you should have bought 1000 shares and make $25,000 ! Dang, why didn’t I buy more shares. Man, if I only had the money I would buy 1000 shares !

A week passes and your stock has bounced around and made it’s way back to $50 a share. It’s Thursday morning and the jobless claims numbers were released at 8:30 EST. Claims were expected to be 475,000 but they were actually 435,000 ! 40,000 less than expected and 15,000 less than last week. Holy cow ! You promised not to watch CNBC but you are anyway and you hear the futures are way up, stocks are trading up in pre-market, Rick Santelli is screaming like an auctioneer on cocaine and even though you don’t have a freakin’ clue what all this means it seems to be a good thing. The market opens at 9:30 EST and your stock “gaps up” to $51.25 and it keeps climbing. By 9:45 it’s up to $52 and you have a profit of $200. Woo Hoo ! This confirms what you knew last week when you were down $125, it’s going to $75 ! Remember this $200 profit you had in 1 week, it will become very important later.

For the rest of the day you never take your eyes off the computer screen. You watch the numbers on your trading platform. Up, down, up, down, your stock bounces around in a 0.35 cent range and at 4:00 it closes at $51.60. You now have a profit of $160. You wish you still had the $200 profit you had at 9:45 but you keep reminding yourself it’s going to $75 !

Another week passes and nothing happens. One day you have a profit of $160, the next day $132, the next day $182. What the heck ? The analyst said this stock was going to $75 and analyst work on Wall Street and analyst know what they’re talking about. Shoot, Maria Bartiromo even mentioned your stock one day on CNBC. Remember the part about hot babes on TV ? You don’t remember what she said about your stock but you do remember her tight fitting blouse that looked like it was gonna bust the buttons any minute !

You’re into week 3 now and you’re tired of watching this stock bounce around. You look at your account balance. You opened the account with $20,000 but it says you have “buying power” of almost $60,000. What ? You call the Help Line number listed on your broker’s site and find out that when you opened your account you were approved for margin trading. Well dang, that sure was nice of them. You put in your money and they tripled it for you. Now the little wheels in your head are really spinning. $60,000 divided by $50, hey, you CAN buy 1000 shares, or more !

Week 4 and you’ve bought another 100 shares at $51. You now own 200 shares at an average cost of $50.50 per share. You have over half of your money tied up in this stock, full steam ahead now ! Your stock trades all the way up to $53.85 and your positions window on your trading platform says $670 in big green numbers. Holy freakin’ cow, you have a profit of $670 but it’s been a month and the analyst said it was going to $75. What’s taking so long ? For a split second the thought runs through your head to sell your 200 shares and take the $670 profit but you don’t. Just a little bit longer and this baby will be at $75 !