Why I Quit Using Stop Loss Orders

Think stop loss orders will protect you? Think again. This page shows why I quit using stop loss orders after the Nasdaq changed the rules.

I used to always put in stop loss orders.

It was just part of the trade. I would enter a trade and then immediately put in a stop loss order. It was second nature. I didn't even have to think about it.

Then I noticed that I was getting stopped out more often than usual. And, I was getting very frustrated.

Well, one day I logged onto my computer to check a stock that I was in and was pleased to see that it was going in my desired direction and my stop loss order had not been hit.

At least I thought it had not been hit.

When I logged into my brokers website, I was stunned to see that my stop loss order had been triggered! I couldn't believe my eyes. How could that be? The price for the day didn't even come close to hitting the price of my stop loss order!

So, how did my stop loss order trigger?

Apparently, in 2007, the Nasdaq changed the rules. Stops can trigger at the bid or ask price! That is how my stop loss order got triggered. So, if that is the case, then what is the point of a stop loss order? Your order could get filled at just about any price!

Then I bought Larry Connors book, Short Term Trading Strategies That Work . The title of Chapter 6 (page 31) is Stops Hurt. They ran tests to try to determine the optimal stop levels.

Their conclusion?

...no matter where the stop is placed, it hurt performance. The tighter the stop, the worse the performance. Amazingly, even stops as far as 50% away hurt the performance!

He then goes on to say...

"Obviously, market makers, specialists and professional traders know that the stops are sitting there and many times they are gunning for them."

I quit using stop loss orders that year and my trading has improved as a result. I still use "stops" but they are mental stops based on the closing price, not the intra day high or low.

This strategy is working very well for me.

So, I eventually came to the conclusion that stop loss orders are far more troublesome than they are worth especially on Nasdaq stocks. They give you a false sense of security and cost you money in the long run.