Bob Prechter Says Stop Using Stops
Bob Prechter has done many experiments relating to online stock investing as well as trading successfully. One of the worthy conclusions he has come to is to stop using stops. Traders do not need a stop top tell them when to get out of the trade.
Prechter is author, co-author and/or editor of 13 books, including Elliott Wave Principle – Key to Market Behavior (1978), R.N. Elliott’s Masterworks (1980), The Wave Principle of Human Social Behavior and the New Science of Socionomics (1999), Conquer the Crash (2002), and Pioneering Studies in Socionomics (2003).
He began his professional career in 1975 as a technical market specialist with the Merrill Lynch Market Analysis Department in New York. Prechter has won numerous awards for market timing, including the United States Trading Championship. He was also named “one of the premier timers in stock market history’’ by Timer Digest, “the champion market forecaster’’ by Fortune magazine, “the world leader in Elliott Wave interpretation’’ by The Securities Institute, and “the nation’s foremost proponent of the Elliott Wave method of forecasting’’ by The New York Times.
Asked why traders should stop using stops, Prechter said: “I think people lose more money on stops than anything else. When a trader suffers five stop-outs at 10 S&Ps contracts apiece, that trader now has 50 points to make up. Every book says to use stops, but it is often a bad idea. Before you recoil in horror, consider that I know a futures trader who steadily makes $200,000-$400,000 every year, and he never uses stops.”
He added, “A stop takes only one aspect of analysis into account: price. There is much more to analysis than price. A stop also makes you lazy. If the market and your analysis turn against you, you are prone to think, “Well, if the market takes my stop, then I’m out.” But if you have already decided that your position is wrong, you should already be out! On the flip side, when you already have a stop in and decide it’s in the wrong place, there is a psychological impediment to widening it. If you don’t act, the stop is typically taken out, and then the market turns your way without you. So it can hurt you two ways.”
In place of stops, Prechter recommend the use of real-time analysis.
