Stop Losses Do Work, Here’s a Great Example Why

In today’s world we have the web to guide us along. From Google to Twitter, Facebook, and Wikipedia, information is at our fingertips.  In the investing world this translates to an ever growing list of credible sources of information. Unfortunately though this also means “leaks” are more prevalent and stocks can tank in a matter of hours because of a simple blog post.

This was just the case last week when an anonymous author on Seeking Alpha who goes by the pseudonym Copperfield Research posted a three part article series on Ebix (EBIX), painting the company as a “house of cards” just waiting to crumble to the ground.

Almost immediately after the first article went out at 1:40 PM EST on March 24th, Ebix started to take a hit. The stock tanked 20% within that first hour, and I was in the stock for 20% of one of my portfolios! Intraday chart below via thinkorswim.

Without a stop loss order in place, this is an instant 20% loss for most investors. Why? Because the average investor is not watching their holdings throughout the day like an active trader. Furthermore, pulling the trigger is not easy especially if it is unknown why the stock is all of a sudden tanking out of nowhere.

This discipline to always set a stop saved my portfolio. I had bought into EBIX’s bull flag breakout at $29.82 the day prior (3/24), and had my stop loss set at $28.90 or roughly 3%. I was stopped out for a quick loss and my discipline to use stop losses once again served its purpose.

Some great articles on Stop Loss Orders:

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