How do you handle a Stop Loss?

…I strongly agree with the philosophy of cutting losses quickly as suggested by many great traders, more specifically: Jesse Livermore, William O'Neil and Nicholas Darvas. Over the past several years, I would implement a trailing stop by manually moving the stop myself as the stock was rising. More recently, I started to use the jazzy tools or new technology that my online firm offered (the system moves the stop for the trader at a pre-determined percentage as the stock rises, say 10% from the price).

Over the past 18 months, I have noticed that several stocks (more so than ever in my portfolio and research) will implode intraday and then rebound in the final hour of trading. This has always been the case since I started investing but has become more apparent in the past year or two (at least to me). It seems that "program trading" is really taking over the individual investor and took advantage of the “little guy or gal” in the latest bull market by shaking out weak investors every chance they get.

I had always cut a loss with my stop already placed at 7-10% below my purchase price, depending on market conditions and individual stock conditions. Several times in late 2002 and 2003, I was stopped out intraday, only to see the stock bounce back by the end of the day. I was becoming angry as my trades were placed correctly but I sold out intraday, only to see the stock end above my original sell stop position.

As the year progressed, I decided to remove my automatic stop loss and determine if I should sell based on the full day's action. My results improved slightly. Stocks that are worthy of keeping are now held until the final trading hour so I can review the entire day’s action without the noise from day traders and program trading. I don’t need to buy back my stocks at the end of the day, the next morning or next several days because program traders triggered my sell stop. On very volatile stocks, such as TZOO, I still place a manual sell stop to protect my downside but I leave room outside of the traditional 7-10%. If I have some profits, I will set the stop at 15% to allow movement during the day.

I must ask:
Does anyone else see similar situations?
I am curious to know if any of you have bought a stock and was forced to sell via a sell stop, only to watch the stock rebound later in the day or the near future. Respond to the blog so we can interact. Don’t be shy.

I went back to read Jesse Livermore and realized that he did suggest to ignore all intraday activity. This advice was given in 1923, so the game has always been the same, as I have been taught, but I have noticed an increase in the program trading over the past 18 months.

NOTE: I am not only speaking of stocks breaking out, I am mostly talking about stocks that have made considerable advances and then correct (healthy corrections on solid stocks). With a stop loss in place, you may get shaken out. I now make all decisions after the market closes. This allows me to view multiple charts and gives me the choice to make an evaluation without intraday emotions fueling my thoughts or persuading that final decision.

Enjoy the Weekend,
Piranha