Jim Cramer on stop loss orders–terribly wrong again! KCI soars; How I trade the 3X ETF’s


I am dumbfounded!     I recently taped some of Cramer’s shows and reviewed Friday’s show this weekend.   At about 10 minutes into his show, Cramer responded to a caller who asked him about the use of stop loss orders.   Cramer ranted on about how he did not want his “home gamers” to put their orders on “automatic.”   Stop losses, he said, were okay for professional traders but not for his listeners who are part-time traders not glued to the market, and who are not robots.   I had to listen to him several times to make sure I heard what he was saying, because his advice was exactly opposite to what I think people should do.   His reason for not using stop losses was that one might get whipsawed–buy a stock at 60, put in a stop loss order to sell if it falls to 59 and then have the stock fall to 58 and be sold out, only to reverse and close back above 60. But it is precisely the part-time traders who are not watching the market every minute who need to have automatic stop-loss orders. Traders who are glued to their monitors can watch their stock closely and manually sell when they want to. It is the part-time trader who get his head handed to him when his stock plummets while he is at work or in a meeting. In 2005, I lost a lot of $$$ profits when I went to a business meeting thinking I did not have to put a stop in on a very strong stock (TASR) I was holding. That mistake cost me big–the market always exacts its tuition, and we must learn from our mistakes.

I could not disagree more with Cramer’s advice.   Before I buy a stock, I calmly decide how much I will let it fall before I think I am wrong and how much of a loss I will tolerate.   In this way, this “home gamer” who   has a full time job, does not have to be glued to the monitor like a professional trader and can go about my business knowing that if my stock falls to my sell level I am immediately and automatically sold out.   Once I have my stop loss order in place, I have taken my emotion out of the trade. If the stock falls and I have taken a small loss, I can always go back in and buy it back if it shows renewed strength–now that’s smart trading!   Every small loss bring me to my next big gain.   It was the   use of stop losses that helped the great Nicolas Darvas (see his book below) to make a fortune in the market in just 18 months. It is how one keeps his losses small.

Put this advice along side a lot of other bad Cramer advice, including calling chartists morons and recommending stocks based on fundamentals alone that were later devastated by the 2008 market decline. (I think Cramer started showing charts for a while after he found that a lot of his fundamental/value choices tanked).

So, how do I put in a stop order?   Before I buy a stock I determine at what level I will have been wrong.   Since I am buying the stock at what I believe is the right time and assuming that it is in an up-trend, I should not tolerate much of a decline below my purchase price.   The best way to enter a trade is to assume it will go wrong, so that I can calmly prepare my risk control strategy in advance.   I select a price level based on prior support, at a moving average or a recent reaction low.   As soon as my buy order is executed, I   place an order to sell my newly purchased shares on stop at my predetermined loss price.   I typically place a GTC (good til canceled order) so that I do not have to put a new stop order in every day.   A day order expires at the close each day.   Now, once the stock trades at the stop price level I put in, the broker automatically sends the order in to sell my shares at the market.   I may or may not sell the stock at the stop order price.   The order goes in line behind other market orders and gets executed in turn at the best price offered.   The greatest risk from using a stop loss order is that if the stock suddenly trades far below the stop price (as in a gap down at the open the next day) one   gets only the best price that someone is willing to pay.   A good strategy is to cancel the stop order after the stock has advanced enough and to put a new sell stop order in at a higher exit price     to ensure I do not give back all of my profit. I do not use automatic trailing stop orders because I prefer to raise the stop price manually after carefully reviewing the stock’s technicals. If I am stopped out and the stock rises again I love to buy it back at a higher price than I sold it.   Such trades often are quite profitable because during the whipsaw, as the   shares decline, they are bought by others who then hold on for a larger advance. Many large advances begin after a sudden decline…….

Meanwhile, the GMI and GMI-R remain at their maximum levels.   As the table below shows,

the QQQQ completed the 16th day of it short term up-trend on Friday.   Both the QQQQ and SPY index ETF’s closed above their 10 week averages for the second straight week, a sign of strength.   The only caution signs I see right now are the fact that 91% of the Nasdaq 100 stocks closed with their MACD above its signal line and the Worden T2108 indicator is now at 84%, not far from the highest levels it gets to.   So, in order not to lose my profits gained in this up-trend, I am moving my sell stops up a little.   Remember, in ancient Rome, the lions ate up all of the prophets!

Did you notice what happened to KCI last week? On March 1, I wrote that KCI looked like a bullish cup-with-handle pattern.   It’s up about 17% since then.

A reader asked me if it was dangerous trading the 3x ultra ETF’s, like TYH.   Yes it is, but only if I have too large a position and do not have a suitable stop in.   Since these ETF’s are designed to move 3x the daily move of the stocks they track, I always tiptoe into my position by buying in small amounts and averaging up.   So, I might start with buying a few shares and only add more after the ETF has moved up. I try to enter at the beginning of an up-trend, when no few typically expect the market to begin a sustained rise. It is at such times that I am most scared to go long. If I had the discipline to just buy the TYH   when my QQQQ short-term indicator turns positive, I would do quite well.   For example,   the current QQQQ up-trend began on 2/25 and QQQQ has risen by 6.2%, while TYH (the ultra 3x bullish tech ETF) has risen 15.5%.   Yes, TYH moves quickly, but I believe the actions I noted above bring   the risks down to an acceptable level for me.

6 thoughts on “Jim Cramer on stop loss orders–terribly wrong again! KCI soars; How I trade the 3X ETF’s”

  1. Anyone who follows jim cramer (total crook) and any of his so-called advice is doomed to start with. They might as well take their money out in the backyard, put it in a pile. Then light a match….

  2. I stopped listening to “blabber mouth” Cramer a long time ago. I dont know why you, ERIC, even listen to this guy. BTW, don’t you think US Steel (X) has just completed a CUP and HANDLE? I invested in X one month ago. Check it out

  3. Frankly, I can’t stand Cramer, but I failed to do is explain his opposition. I believe stops can be an excellent strategy, but they aren’t in all cases. A case in point where one might set a stop below an obvious support and the stock has average volume less than maybe 300-400 thousand on average. While this isn’t exactly a thinly traded stock, its quite common for a stock at support to sometimes reach down 1-2% below support to clear out the stops. This isn’t by accident and if it happens at all seems to occur more often in the earlier trades of the day. One can say they’re just setting stops too close to support, but 2% away? More widely traded stocks are harder to manipulate due to the sizable volume.

  4. Hi,

    Any new thoughts or blog post on the stop loss strategy after the flash dip earlier?
    What was your experience during that phase?

    Personally, I keep mental trailing stop loss, baised by some observations attributed to Zweig.


  5. I love Cramer and attribute my consistent performance of beating the averages to him. Regarding stop loss strategy, I DO NOT use it and have benefitted greatly. Specifically, during the flash crash. Quite the oppostite. I had a handful of limit buy orders in at the time. All of them hit and immediately bounced back. A huge gift and I wouldn’t have had that strategy without Cramer! Easily, the best teacher of investment strategy for the average person. The proof is in the results and I’m much better off for listening and reading Cramer’s books.

  6. Cramer is an idiot. On his 7/12/12 show, he told a Tyson employee that he SHOULD NOT buy TYSON company stock w/ the 25% “match” they put in. This is the second time I’ve e-mailed Cramer w/ this dumbass advice (prior was the same thing on Home Depot a couple years ago). He fails to answer, nor does he discuss it on his show.

    Where can you go and get an AUTOMATIC 25% return on your investment? I got a 15% kicker as a Wal-Mart affiliate employee and made 150%+ over 9 years in the plan.

    I just wonder where his fans are when they have to realize the above.

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