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Never trade/invest with using a stop

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There are many "excuses" that traders come up with for not using a stop on bullish or bearish positions. Some think that stops are only for stocks that don't have earnings or are considered highly speculative. Some feel they know the stock so well, that they don't need a stop. The historical trading in shares of Enron (NYSE:ENE) and extreme pain and financial hardship this stock has had on investors is proof, that a stop must always be used.

Today, it looks as if the last hope for a potential recovery for shares of Enron (NYSE:ENE) have been squashed as "white knight" Dynegy (NYSE:DYN) and Enron (ENE) agreed to call off merger talks.

Enron Chart - weekly interval

I have empathy for those that may have owned or own shares of Enron (NYSE:ENE), especially those employees that may have been locked out of their company 401-k plans that couldn't sell the stock during its recent decline from $20. But that's where the investor/trader with knowledge of the options market may have had the upper hand. There was nothing that said the employee that owned a large portion of the stock in their retirement funds couldn't hedge those holding and buy some protective puts to hedge their retirement savings. (See Bailey's Basics "What exactly is "Hedging a Position?")

There are a couple of things we need to point out here. It is NOT prudent investment policy to hold more than 20% of your retirement in any one security! Over the years, I've talked with people that worked at Sun Microsystems (NASDAQ:SUNW) that had 100% of their retirement savings in the stock and that's all they needed as the stock was surging every month. Sometimes, employees truly have such a faith and confidence in the company they work for that they fall in love with the paycheck as well as the stock. A employer "owes" you a paycheck for the work received, but the employer doesn't necessarily "owe" you a stock price appreciation. Treat you're company sponsored retirement account just as you would your normal trading/investing account. NEVER put more than 20% in any one security at a time and only invest what you can afford to lose if you refuse to use a stop.

Jeff Bailey
Senior Market Technician
Option Investor

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