Painting the Tape
Any trader or investor must consider the use of stop loss orders. Since circumstances may arise that suggest the original decision was wrong, one must be willing to exit the trade at some point or to face major losses. This is an element of trading discipline.
Placing a standing order risks a situation, especially in futures trading, where locals "run the stops." If trading is slow, active floor traders may probe for and find the stops. Everyone is looking at the same charts, and the placement of stops in a logical fashion may make one a victim of a small run, followed by a bounce back to normal levels.
Placing a "mental stop" can work if one is always watching. Even then there is the problem of painting the tape. The recent controversy over Jim Cramer’s comments, well documented by Trader Mike, have called attention to the dilemma. Cramer talked about the potential for hedge fund manipulation of individual stocks and even the entire market, through aggressive selling, put buying, and influencing key media figures.
While we have no opinion on the Cramer controversy, it is timely to take note of a broader and similar question related to exchange rules, ETF’s, and selling on downticks.
Scott Rothbort wrote an excellent piece on this topic, now available on his blog, one of our featured sources. The article may seem long and detailed, but that is because it is carefully written and covers all of the bases. At "A Dash" we hope that exchange rulemakers will act to protect individual investors. The markets carry a message, but we should hope that the rules make that message clear.
We hope that Scott’s views, reflecting his broad experience and wisdom, attract attention.