Here’s Why You Need to Stock To Your Stop Losses

Maybe you think the market has topped out… that the bull market is over and stock prices are headed much, much lower.

Or maybe you believe the market is entering a “Melt Up” phase, with new all-time highs just around the corner.

Chances are, you have a gut feeling one way or the other.

And that’s a good thing.

As a trader or investor, you should have opinions – even strong ones – that are supported by evidence.

Otherwise, you’ll never find the courage to put your money to work.

But sophisticated traders know that once you exchange your cash for shares, your opinions don’t matter.

You can research an idea for months before deciding that you can’t possibly be wrong. You may think it’s the best idea you’ve ever had.

And still, the stock will either go up or down.

If you’re lucky, it will go up a lot before it goes down… And you’ll make money. But even if a stock treats you well for a while, no matter how much you love it, it will never love you back.

This is an extremely important idea right now. So today, we’ll look at one of our past big winners in our DailyWealth Trader (DWT) newsletter – an idea that was easy to love.

And we’ll show you why… you need to stick to your stops.

We recommended buying shares of National Beverage (FIZZ) on February 3, 2017. The company was growing rapidly. Its flagship brand LaCroix was flying off supermarket shelves. And its founder and CEO Nick Caporella owned (and still owns) a huge 74% stake in the company.

The stock was reasonably priced. Yet lots of traders were betting on lower share prices… which set up a massive “short squeeze.” (This happens when short sellers try to exit their positions when few people are selling… so they’re forced to offer to buy at higher and higher prices. If short interest is high enough, the stock can explode higher.)

DWT readers who followed our advice on National Beverage saw profits from day one. The company’s sales and earnings were spectacular. And gains hit the 100% mark by mid-July… just five months after our recommendation.

Again, it’s easy to “fall in love” with a position that makes you a lot of money quickly.

Well… Not long after that, the stock turned lower. We didn’t want to sell such a big winner. But it triggered our stop loss – the price level at which we had planned to get out of our investment. So we told subscribers to sell their shares for a 91% gain.

As you can see in the chart below, it’s a good thing we did. Had you held on, at first you would have been tempted to believe you made the right decision. The stock rallied soon after we stopped out. Then it bounced around for another few months before breaking down to new lows…

If you had bought at our recommendation and were still holding National Beverage today, you’d be up 73% instead of 91%. And instead of booking the bigger gain in about eight months, you would be wondering what to do after 15 months.

Where will National Beverage go from here?

We’re not concerned with that. We’re out. We’ve moved on. And we’re happy we did.

In DWT, we’ve said all year that investors should expect volatility. The market could go higher from here. It could go lower. Or it could first do one, then the other. We just can’t know… especially in the short term.

After this nine-year bull market, you may be holding some big double-digit (or even triple-digit) winners. Lots of stocks have “treated us well”…

But they don’t love us. So make sure you benefit from the good times you’ve had… And stick to your stop losses.

Good trading,

Ben Morris and Drew McConnell

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Source: Daily Wealth