From: gts (gts_2000@yahoo.com)
Date: Mon Jun 16 2003 - 09:08:57 MDT
Olga Bourlin wrote:
> Huh? I wasn't talking about properly timing anything. I was
> talking about minimizing one's risks with stops.
Use of a stop loss order is an attempt to time the market. It is a bet that
the price will continue to drop after you are stopped out.
The idea that they "minimize risk" is wrong, at least in the manner in which
you're using the term, because there is something called opportunity cost
that one incurs the moment one sells and goes to cash. The risk of
opportunity cost offsets the risk of being in the market. Money markets pay
a miserable rate of interest, far less than the market has returned over the
long run. When you sell and go to cash the difference is a LOSS.
Stop loss orders would make sense only if we could say that falling prices
lead to more falling prices. But as I've stated, despite appearances, prices
do not trend. Studies show that the direction of price change on day x in no
way influences the direction of price change on day x+1. The appearance of
short term trends in the market is an illusion. Even random data appears to
trend.
-gts
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