Do you use stop losses in your mid-term system?

Tonight we are going to answer an important question:

Do you use stop losses in your mid-term system?

This is a difficult question to answer. Our system does have defenses built in (in case the market goes too strongly against our signal), but we do not use a stop loss of a specific percentage. Why? Because in the long run our system is much more profitable without the use of a simple stop loss. Often system designers will choose a random number as a stop loss in their system. The percentage has little (if any) historical significance. For example, William O'Neil (founder of Investor's Business Daily) advises putting a 7%-8% stop loss from the buy point immediately after purchasing a stock. Even though this is good advice for a new trader learning to manage his or her emotions, as a locked percentage has no relevance to the specific price and volume action of any given stock, it is only useful for the beginning trader. More experienced traders will yield much higher percentages by following a more refined methodology.

We chose not to include stop losses, as the gains would always be higher without them in the long run, even if we took history into account when selecting the specific percentage number. By choosing not to have stop losses in our system we will have higher profits in the long run, have fewer trades in the system, and allow an environment where our subscribers can add to their positions after a meaningful correction against one of our signals.

Therefore, we would advise adding in the current market environment (if you have not already done so). If only a portion of your portfolio is in Nasdaq Wizard, we would recommend taking additional money and adding it here.

Tonight we are going to look at two charts of the most beaten up sector - the Semiconducors. The first chart is of the Semiconductor Index. We have added an uptrending line on the chart to show the neckline of the head and shoulder formation that began in November of 2006. We are using Fibonacci retracements to show how far the Semiconductor Index will fall, according to the measure rule (the length of the middle of the neckline to the head). The measure rule suggests that the 410-415 area would be the stopping point of the decline. This area has significant support as well, as shown by the horizontal line. It is quite possible that the Semiconductor Index hit a bottom today.

The second chart is of the Semiconductor Holders ETF - SMH. Here we can see that major support is in the 30-31 area (the top of which we closed at today). Even though the measure rule suggests that SMH has further to fall, as this head and shoulder formation was trending up, we can assume that the fall would be lighter. Therefore, it is quite possible that SMH hit its bottom today as well. If not, we do not see the ETF breaking the 30 level.

Starting tonight we will be sending the mid-term commentary out in an e-mail each week. If you are reading this off of the website and have not received an e-mail, please contact us immediately.