I like to read a lot of books and occasionally I'll pick up an investment book. One I've had sitting around is Ken Fisher's The Only Three Questions that Count. It has been a best seller so there is a good chance you've read it. Maybe you have even been influenced by it. Well I have only leafed through the book so far, but he has a section in the back that has just about the worst investment advice I have ever heard. Maybe other parts of his book are good, but this one section is so wrong in my opinion that it compels me to write against it.

On page 312 of this book he tells people not to use stop loss orders. He claims that all they do is make you miss out on gains by shaking you out of your positions. He says that if a stock drops 15% or 20% or whatever that it actually means nothing, because "stock prices are what a statistician would call not serially correlated - meaning when a stock moves in any given direction, by itself the odds are 50/50 that it continues in that direction or reverses trend."

He then tries to make the reader feel insecure about using stops on top of his warning that using them will make them miss out on gains, by writing, "Even if you were adamant in wanting to use stop-losses, despite my best efforts to discourage you, what level would you choose? People tend to pick round numbers like 10 percent and 20 percent and those who use stop losses tend not to pick numbers bigger than 20 percent because if you believe stop losses will work, why favor 30 percent over 20 percent?"

Well he is correct in the sense that yeah if you use arbitrary stop loss points you will get shaken out a lot of times, but wrong in giving you the impression that using them means you will just get shaken out all of the time.

The truth is I use stop loss orders all of the time and if I didn't I would not make a single dime in the stock market. In fact I would have gotten wiped out a long time ago. Just look at this summer for example. I went long gold stocks and got stopped out. If I hadn't gotten stopped out and held on I would seen a 50% loss in those positions. Maybe even more.

I don't know of a single trader that is successful year over year who does not use stop loss orders. Most people don't use stop loss orders and that is why most people actually lose money in the stock market. And if you don't use stops it is only a matter of time that you will have to suffer a horrific loss as millions of people have learned this year.

Even Ken Fisher and his clients have been crushed in this market this year. In fact he has gone so far to file a lawsuit against a client who has complained about how his firm operates and his losses and threaten others who have posted on his blog with lawsuits also. I don't know the particulars or care to take the time to figure them out. My point is that I think that when he warns people off on using stop loss orders in his book he is giving out horrible advice in my opinion and is using a false argument.

I think he is right in that it is not a good idea to just set stop loss orders at a fixed percentage point and always use that percentage point when you enter a new position. You will get shaken out a lot if you do that. What you need to do is put a stop loss point at a point in which if a key support level is taken out or that a technical point is breached that it means an event has taken place that means further losses or likely or that you are wrong about the trend that you had expected.

When I enter a new position I always try to figure out where I will put my stop using this method. Then I figure out how much I'm willing to risk and what the potential gain will be. That gives me an idea of whether or not the position is even worth taking from a risk/reward standpoint. That's simple stock trading basics.

But I ALWAYS think about where my stop is going to go and how much I'm going to risk. If you do not and don't use a stop then you are just literally throwing money at the stock market without any game plan or discipline. You do this and it will only be a matter of time in which the market crushes you, as so many people have discovered this year. Ken fisher himself is an example of how you can be right for many years and make a lot of money, but if you don't use stops it is only a matter of time that you will get hurt - and hurt badly.

If this has happened to you this year then realize that you certainly are not alone. And even the biggest guys on Wall Street, such as Ken Fisher, have taken big hits this year. What you need to do in my opinion though if you are serious about making money in the stock market is to take steps to make sure you don't make the mistakes you made this year again.

And yes if you held through this bear market without selling you made a mistake. I don't care what anyone tells you. Losing 40% or more in a year is a mistake and I'm not going to just tell you what you want to hear if you are in that situation - hold on and never change what you are doing. Really what you do right now with your positions isn't that important. If the stock market went back up and made all of your money back you'd just end up going through this all over again in the future if you don't learn from this. The most important thing right now isn't making your money back, but learning from this experience.

You also won't learn by blaming your brokers or investment advisor either. I fear that a lot of the clients slamming Fisher may just be people trying to blame them for their losses. If you are serious about making money in the stock market you have to take responsibility for that money yourself. No one can really do it for you.

Here is a recent email I got about stop-loss orders:

"How do you keep from falling into the same traps over and over---such as: establishing stops and then abandoning them when your stock gets to close to them ( crazy I know--and I am getting a lot better-but it has taken six years). That is what it is all about "mental fortitude" for lack of a better term. Conquering fear--is there any way to do it than by trial and error?"

I don't believe in conquering fear in the sense of saying I'm scared I should not be scared. I really don't believe people can "control" their emotions. The reason I say this is one thing I like to do is play poker every once in awhile. Sometimes you'll see someone at the table who is nervous and gets worried other people can tell what they have. So they try to control and block out their nervousness. That just makes them even more nervous and easier to "read."

I think trying to fight emotions and bottle them up actually makes them stronger.

The key is to have a game plan when you take a position. If you have a strategy that you believe in then you won't abandon your stop loss orders if they are a part of that strategy. You need to change your focus from the individual position to your strategy. If you do that then your "fear" will simply just go away. Its not about being mentally tough. It's just about having a game plan and sticking with it. When you see it works then you don't have any anguish over the stock market, because focusing on your game plan makes you look up ahead at further gains in the future that you will make from applying your strategy instead of focusing on the gyrations or small losses that come from an individual position.

To carry this back over the the poker table analogy. Good poker players are hard to read, because they are focusing on you, what you are doing, the cards, and the situation instead of trying to use all of their energy to control their emotions . It's all a matter of what you choose to focus on. But in the stock market when people get nervous about their stops and then cancel them it doesn't mean they don't have the emotional make up to trade. It means either they don't have a real strategy or that they really don't have faith in the one they are using.

Another question:

"When you are looking for trades, whether it is for position trading or swing trading, what criteria do you use to screen through the hundreds of stocks out there. Are you physically looking through hundreds of stocks or do you use any screening software that narrows down the search for you. "

I look through the individual stocks with TC2007. You can flip through each one just by pressing a space bar so it doesn't take long to do. I've never had much success with stock screening software myself, but I'm not good enough with math to make my own stock screening algorithms.

As for the stock market right now THIS ARTICLE CONTINUES IN THE WSW POWER INVESTOR MEMBERS ONLY AREA.