Hello fellow investors

I know that this is a subject that we have been over a number of times, but I feel that it is a very important subject, and every now and then we should take the time to rehash it for the benefit of new investors that are always coming on board.

The subject is stop-losses.

First of all who do we generally see promoting stop-losses?

Manipulators / those who make a living out of short selling stocks.

I guess the first thing to understand is what it is to be short a stock.

Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price. Now there is nothing wrong with legal short selling, however, it is the manipulation of the stock that goes along with it that is the problem. Those who are short in essence are betting that the stock price is going to go down, but were the problem lies is that shorters will through stock chat boards and other media, try to spread false and misleading information to try to scare investors into bailing on a stock which will precipitate selling pressure in order to maximize their gains. The SLI hub at Agoracom is regulated by fellow investors, and therefore any bashing and manipulation on this site is watched and dealt with promptly.

Stop-losses can be a great tool for helping to secure gains when used properly and at the right time under the right conditions. But, and that is a VERY BIG BUT, can be very dangerous to an investor if used incorrectly and in the wrong situation. Let me explain.

From investorglossery.com

A stop-loss is used to specify a price at which a trader wishes to sell their stock or security. Typically, stop-losses are used to protect long positions; for example, a trader may place a stop-loss for 10% below the current price.

Stop-losses do not guarantee the price at which the sell order will execute. If the price gaps past a stop-loss, it becomes a market order and is often executed at a highly unfavorable price. Most brokers allow traders to specify whether or not a stop-loss can be activated during the after-hours sessions. Because after-hours trading can be unpredictably volatile, many traders choose to disable their stop-losses for the session.

A trailing stop is a stop-loss where the exit price automatically moves up with a rise in share price but does not decrease with a drop in price. http://www.investorglossary.com/stop-loss.htm

Two things of importance to note in the above definition that many brokers do not tell you is, “stop-losses DO NOT guarantee gains” and “many traders disable them in situations of unpredictable volatility”

That last statement is important. WHY? Because many inexperienced investors are led to believe that they can hold on to any gains they make by using stop losses, and what is more volatile than a Venture exchange junior exploration stock.

Let’s say you bought SLI at $1.50/share and the price has now gone up to $1.70 and someone on a chat board who indicates he has lots of experience says, “you should really put a stop-loss on your investment that way you won’t lose what you’ve gained” So you take a look thinking what a great idea, didn’t know I could do that. Now I can’t lose. So you arrange to put a stop-loss on your investment and set it at $1.65, that way if the price drops, I will at least have made $0.15 on every share. (The thing which investors don’t realize is that professional traders use software that enables them to know where these stop-losses are setup.) So when they see that a bunch of inexperienced investors have a whole lot of stop-losses setup. The game is now in motion. They team up for the short play. Someone may even appear on the board trying to convince everyone (like one particular guy was doing on the SH board) that it is a good idea to use them and lock in your gains. They may even go so far as to tell you were you should put them.

When they have manipulated enough to the point that they feel they have enough of them lined up for a hit, They may send fellow manipulators onto the chat board to start bashing the stock and spread lies and false information to scare investors and make them extremely nervous. Once they feel they have got the board worked up enough, Bang, they will dump a bunch of shares on the market, well below the market price, and they get bought immediately in some cases, by one of their partners through another trading house, this sudden collapse in share price will hit the first set of stop-losses panicking the inexperienced investor and start them thinking, “maybe this guy is right, something is wrong” and then they start selling. What you need to realize is once a stop-loss is triggered, all those shares now become a “sale at market”. In other words they will be sold at whatever the current market price is or whatever price someone is willing to pay for them.

So now they’ve hit the first set of stops, and all of a sudden a hugh block of shares, could be hundreds of thousands hit the market along with those selling do to panic and will sell for whatever someone wants to pay for them. So bottom feeders start bidding $1.30, and they are bought, dropping the price to $1.30, triggering more stop-losses and the process continues. But each time the market gets flooded with more and more shares at market and a cascade effect occurs, plunging the stock downward. By the time the cascade losses steam, the share price might be $0.40 or $0.50 cents. Those who are at work or not watching what’s happening will come home turn on the computer to find out that the bottom fell out of their investment.

But, they are relieved because they put a stop-loss on their shares.

However, when they check their account, they find out that they no longer have an investment in that company, and the average price they sold their shares for was $0.60 cent/sh. They lost almost two thirds of their money.

The above example is not meant to scare investors, it is meant to educate investors.

This cannot happen to you if:

1)You understand what stop-losses are, and where they are to be used.

2)You understand that stop-losses DO NOT guarantee gains.

3)You are aware of how they can be used against you by experienced manipulators, shorters and predators in the market.

4)You understand the Fundamentals of your investment and have done your DD.

5)You remain calm and confident in your investment through research.

If I would leave you with one last piece of advice regarding stop-losses; It is that Stop-losses are a great tool to used in the case of extremely stable stocks such as bank stocks or any blue chip type stock for that matter, were they consistently trade hugh daily volumes and the stock price generally trades in a reasonably narrow range with very little if any volatility.

In a junior Venture exploration stock were trading volume changes drastically from day to day from a few hundred shares to a million in some cases, and because of this the share price can also fluctuate wildly. One should never and I repeat NEVER use stop-losses on these volatile junior stocks, unless they are prepared to lose it all.

In a junior exploration stock, using stop-losses can be extremely dangerous to the inexperienced investor.

Hogtown