I rarely use stop losses. When I have I would almost invariably have been better off selling the stock at that time. I have a core holding in AMD which I hope will make me rich someday, and I have some AMD trading positions which have been reduced somewhat over the past few days. If AMD drops below what I sold for I will start to re-accumulate these trading shares.
I copied this a while back from a posting somewhere:
The Stop-Loss! A Double Edge Sword!
The "stop-loss order" instructs your broker to sell your stock at the market price (market order) if and when the stock trades at or through a specific price (stop price). The investor who purchased a stock at 30 dollars that is now trading at 50 dollars has a 20-point profit margin. Although he intends to hold the stock for a few years the constant drumbeat of interest rate fears, Greenspan warnings, and growling bears has caused him to take extra precaution by placing a stop-loss at 35. As fear and negativity escalate in the market, and analyst start terrorizing the investors with their Dow 7,500 by December predictions, the investor rethinks his position and raises half of his stop-loss order to 40. Other investors, who purchased at 40 dollars, may place a 45-dollar stop-loss order. As the media and brokerage firms intensify fears, stop-loss orders increase. Day after day the brokerage firms receive stop-loss orders from frightened investors. Soon hundreds of thousands of shares are entered on the market makers book ready to sell 5, 10, 15 points below 50. As the stop-loss orders multiply, they will begin to act like a magnet dragging the price down through various stop-loss levels.
Now think? Why would anyone buy a 50-dollar stock for 50, when people are willing to sell for 35, 40, 45 -dollars? Of course, only the brokers and market makers that function in what has been described as a collusive relationship know at what price all the stop-loss orders are placed. No wonder some market makers pay 30-40 dollars per 1000 shares to a broker to have an order placed on their book (known as "buying order flow")? If you haven’t figured it out by now, you better get out of the market.
A 35-dollar stop-loss order guarantees a market maker that he can buy a 50-dollar stock for as little as 35-dollars. If he shorts it at 50 and scoops it at 35, he nets 15 points.
Let’s suppose that stop-loss orders have been placed as follows: 300,000 shares at 35-dollars, 200,000 shares at 40-dollars, and 200,000 at 45-dollars. For the past few weeks the stock has been treading water between 50-54 on light volume. For every stop-loss order at 35 the market makers will attempt to short-sell the same amount at 50-54 range while displaying size on the bid. To disguise his behavior he and several other market makers will line up on the bid with huge volume about ½ point below the best bid. On the offer side of the street you will notice that most of the selling is done through anonymity -- ECN’s. Hiding behind the ECN’s are the short-selling market makers that comprise the bid load. Most people see the strong bids and buy into the market makers short sale. This can go on for days and be misinterpreted as accumulation. The new buyers become the catalysts that create downside momentum.
One-by-one market makers sneak off the bid until a 2-point decline is represented by less than 2,000 shares on the bid. Suddenly the market takes a turn to the downside and the new buyers decide to get out! Much to their surprise all the phony bids have been pulled and huge size is placed on the offer. Market makers pile on the offer like an elephant sitting on your sofa. Every mother’s son who bought in the 50-dollar range will soon hit the bid like a house afire. Goodbye 50, and hello 35. It would have been better to sell at 50 and buy back at 35 than to use a stop-loss order.
This is just one of the many ways investors suffer manipulation!
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