The Four Dirtiest Words in Trading

The Four Dirtiest Words in Trading
By Brian Hunt, editor in chief, Stansberry Research
August 31, 2009

I heard the four dirty words of trading last week...

My friend had recently purchased stock in a small oil company for around $20 per share. Things weren't going well for the company, so its share value was down to $8 – a 60% loss for my friend.

Here's what he said: "It will come back."

I shuddered at his analysis of the situation. I shuddered at those four dirty words.

This is the mantra of stock market losers. If you catch yourself making this statement, immediately sell all your stocks and stick the cash in the bank.

You'll be much better off financially if you do. You'll also have a lot less stress in your life.

"It will come back" is a common reaction investors and traders have after seeing a stock fall 30%... 50%... or 70%. Most folks just can't stand to admit they're wrong. Saying "it will come back" allows them to convince themselves they aren't wrong... just "early."

It allows them to keep hope alive... and to ignore the elephant in the room: They need an absolutely huge, highly improbable gain just to break even.

Consider this: If you buy a stock at $20 and it sinks to $8, you need a 150% gain just to get back to breakeven. We all know how rare a 150% move is. Saying "it will come back" ignores the overwhelming probability that you are sitting on a loser that will keep losing.

But most folks don't consider the odds when it comes to putting their hard-earned money in the stock market. That's why the majority of folks lose. That's why Wall Street firms have such beautiful, expensive buildings with lavish furnishings.

Many folks have 10 or 20 worthless losers in their accounts that they have moved to the back of their minds... 10 or 20 losers they still believe will "come back."

As I said, the solution for these folks is to sell everything and stick the cash in the bank. If you're one of them, do some housecleaning. If you have a group of stocks that will "come back," face reality and throw them out like yesterday's newspaper. This will clear out your mind and your account.

A Short Guide to Using Stop Losses

The Question Every Rich Trader Asks All the Time

Getting rid of losers is the cure for the disease. But a better solution is not to contract it in the first place. Use stop losses – the predetermined points at which you will sell positions if they move against you.

Sure, it's a little uncomfortable to face your losers and admit you were wrong. But it's the only sure way to make money in stocks: Use stop losses... realize it's highly unlikely big losers will ever get back to breakeven... and always avoid the four dirty words of trading.

Good trading,

Brian Hunt

Fed official bucks the party line... admits unemployment is 16%
Says it's much worse than people think...

The No. 1 reason natural gas will plummet
It's going to be a "trainwreck."

The first rational thing Barney Frank has done
Working with Ron Paul to audit the Fed... says bill will pass this October.

•	Intel jumps 4% Friday... strong demand forecast pushes several chip stocks to new highs.
•	Copper a penny shy of $3 per pound after seven straight up weeks.
•	Sugar surges to 28-year highs... Indian drought adds to a 90% spike in prices this year.
•	Japanese stock fund EWJ up 10% in six weeks to 10-month highs.

	Last	Change	52-Wk
S&P 500	1030.66	+0.25%	-19.58%
Oil (USO)	37.54	+1.58%	-60.76%
Gold (GLD)	93.21	+0.45%	+14.57%
Silver (SLV)	14.07	-0.15%	+5.39%
U.S. Dollar	77.97	+0.49%	+4.96%
Euro	1.44	+0.90%	-2.30%
VIX	24.62	-1.32%	+24.60%
HUI	359.64	+1.91%	+3.79%
10-Year Yield	3.46%	0.02	-0.28

Advertisement

Company	Sym	Industry
Cymer	CYMI	semiconductors
Bonavista Energy	BNPUF	oil & gas drilling
Bally	BYI	casino games
NVR	NVR	home builder
AmerisourceBergen	ABC	pharma
Cognizant Tech	CTSH	business services
Netlogic Micro	NETL	semiconductors
MFA Financial	MFA	virtual bank
Medarex	MEDX	biotech
Virgin Media	VMED	CATV Systems
Micron Technology	MU	semiconductors
Marvell Technology	MRVL	semiconductors
National Australia	NABZY	bank
Evercore Partners	EVR	asset manager
Health Management	HMA	hospitals
AVX	AVX	electronics
Cree	CREE	semiconductors
Mylan	MYL	pharma
Mead Johnson	MJN	baby food
EMC	EMC	data storage
Tech Data	TECD	computers
Oshkosh	OSK	trucks
Canadian Tire	CDNAF	tires
NVIDIA	NVDA	semiconductors
Wipro	WIT	outsourcing
Telvent GIT	TLVT	business services
Men's Wearhouse	MW	clothing stores
Rock-Tenn	RKT	paper products
Macrovision	ROVI	graphics software
Dollar Tree	DLTR	dollar stores
Western Digital	WDC	data storage
Texas Instruments	TXN	semiconductors
Power Integrations	POWI	semiconductors
Banco Macro	BMA	bank
STEC	STEC	data storage
Red Back Mining	RBIFF	metals mining
Ivanhoe Mines	IVN	metals mining
BMC Software	BMC	business software
TJX Companies	TJX	department stores
Euronet Worldwide	EEFT	business services
Silicon Laboratories	SLAB	semiconductors
Allied World	AWH	insurance

Company	Sym	Industry
Hampton Roads	HMPR	bank
Capitol Federal	CFFN	savings & loan

Weekend Edition: The Best Way to Sell Gold to China
August 29, 2009

Here's How to Bet with the World's Best Short Seller
August 28, 2009

The Great Economic Recovery of 2009 Is a Fraud
August 27, 2009

Commodity Q&A: The World's Most Absurd Ads for Green Power
August 26, 2009

There's a Gun Pointed at Your Head
August 25, 2009