If you are following my trend tracking approach to investing in no load funds and ETfs, you know that I’m a strong advocate of using sell stops.
Obviously, you can’t place sell stops for mutual funds. You need to track them yourself and place the order after your point has been triggered.
What about ETFs?
Should you place your sell stops ahead of time?
In my advisor practice, I only work with day-end prices and ignore the intra-day fluctuations.
Why?
The reason for my sell stop is to get out of a position only if the long-term trend has reversed, which means that I don’t want to be subjected to the minute-by-minute volatility of the markets.
Here’s what reader Kurt experienced:
“I had the stop loss sell points at my broker; unfortunately I seem to be getting stopped out at the worst possible intraday prices. I think I’m just going to execute my sell points myself…No point in showing my hand.”
If you work with day-end pricing only, there is no reason to place your order ahead of time. For one, if the markets move up, the sell stop point changes and you have to change your order as well.
Two, let’s look at what happens to your pre-set sell stop. It goes to the trading floor and becomes part of a trader’s stack of orders, which he executes as per instructions.
Now remember, this trader also scalps the market for his own account. Hmm, do you think him knowing where some of the buy or sell stops will be triggered, gives him an edge? I’m not saying that anything unethical would ever happen on Wall Street’s trading floors, but it makes you think, doesn’t it?