Why You Should Loosen Your Stops,

Not Tighten Them

By Mike Cintolo
Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader

The lesson: Loosen Your Stops. It sounds simple but is hard to do.

How to Loosen Your Stops

When I first began at Cabot back in 1999, I knew all the common investing sayings, most
of which are true. But one of them—use tight stops so you never lose big—ended up being
a bit misleading. It turns out that those who keep tight stops on volatile stocks often lose
more than those who use looser (but still reasonable) stops because they get shaken out
of leading names on what turns out to be normal weakness.

That last part is key—your job is to understand what is “normal” action for a stock and
then try to build your rules around that. And it turns out normal action for a big winner
actually includes a ton of crummy action! Good-sized earnings gaps lower,
underperformance for a few weeks, dramatic reversals, downgrades … you name it, and
even the best performers suffer from them.

Thus, if your goal is to ride out an intermediate- to longer-term trend (granted, not
everyone is shooting for that), you need to accept the fact that a growth stock can easily
pull in 15%, 20%, sometimes 25% and loosen your stops based on that.

To be clear, that doesn’t mean you should use massively wide stops initially.
I practice a “tight-to-loose” method where the initial loss limit would be
maybe 10% to 12%, but once it gets going, I tend to loosen it out a bit. And if
the run continues and I take partial profits, I can then give my remaining
shares even more leeway so I can ride out normal corrections and benefit
from a longer-term move.

I won’t get into all the details here (though feel free to join us at the Cabot Wealth
Summit on August 14!), but suffice it to say that if you’re finding yourself repeatedly
getting knocked out of stocks after a couple of bad weeks (only to see them rev up again),
try to loosen your stops on your profitable holdings. Obviously, there will be times where
you’ll wish you didn’t give your stock an extra few points, but all you need to do is avoid
one shakeout to make a big difference in your portfolio.