Invest and Trade Profitably with Jon Johnson

You have remarked often about cutting losses on new positions to 7 to 8%. My question is when is the position no longer considered “new”? An example of what I mean is let’s say that I have owned a stock for a month or 6 weeks and it’s moved up and down and then after being up 6 to 10% it drops down toward the original purchase price, do you recommend setting new stops at any immediate rise in price, or should I just keep the original 7 to 8% stop in place?

August 30, 2000

The 7% to 8% rule applies for new purchases or if a stock does not perform well and hangs around its purchase price. If we have confidence in a stock and are willing to hang onto it even if it does not perform as anticipated but holds right above the purchase price, we would keep the 7% to 8% loss or even tighten it up so we don’t lose much if the stock starts to roll over. If it is just a shakeout, we can always get back in without much of a loss if the stock starts to perform as we want. Typically we don’t like to stay in a stock or option that we have pegged for a certain move, but it does not make it. Something is not right.

The situation you described sounds similar to a move that was anticipated, but did not pan out. If the stock moves up 10%, in a choppy market we would be inclined to slide the stop loss up under the price, keeping in mind support points. A stock can come back and test a breakout point (that should now act as support), and if the market is okay and the stock is pulling back on low volume, we don’t want to be stopped out on a test of the breakout if the stock has moved up only 6% to 10% on the breakout. After a month to six weeks, the stock most likely has not made the break we were looking for. We would tighten stops to protect gains and prevent a loss; that way if the stock does start to perform as originally anticipated, we are okay. If we get stopped out and then it starts to perform, no problem because we have not lost a thing (except time) and can jump back in with the money we protected from a potential big fall right off the bat.

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