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When traders first begin considering their stop losses, keep in mind this comment from Tom Baldwin, a leading day-trader. Traders set their stop losses, and then stick to the plan.

How do traders go about setting stop losses? For example, if traders had a one dollar stock that moved up five cents on average over the last 20 days, that doesn't tell traders whether the stock is moving up or down. Although their methods of calculating this stop loss may vary, all traders have a stop loss in place. The stop loss is a crucial part of the traders trading system.

When traders first tackle considering their stop losses, keep in mind this elucidate from Tom Baldwin, a leading day-trader. He said, “The best traders have no ego.”

Successful traders are faced with losses constantly, and they swallow their pride and get out of the position when they have to. This allows traders to survive in the market long enough to be successful. Traders set their stop losses, and then stick to the plan.

How do traders go in all directions setting stop losses? There are several different ways. Traders could base a stop loss on a percentage retracement, where the avowed share prices retrace a various percentage of the entry price ere then the exit. Different indicators can be used to identify where the stop loss is going to be set. Traders could also use support and resistance stops to set the level at which exit is made. The key is to simply have a stop loss in place.

Personally, I find these options too subjective. I prefer having a mechanical way to rationalize my stop losses, so I use a volatility based stop. The reason I use this type of stop is volatility generally represents a measurement of how quickly the stock either rises or falls (market noise). Consequently, if I measure the stocks volatility, and take a multiple of that value, I’m probably going to have set my stop loss likewise the immediate noise of the market. This ensures I am not stopped out of a position too often.

Traders can measure volatility by using the usually True Range (ATR) of a stock. This value can be found with most packages. Basically, the habitual True Range (ATR) indicates how much a stock will move on middle-of-the-road over a determinative period. For example, if traders had a one dollar stock that moved up five cents on central over the last 20 days, that doesn’t tell traders whether the stock is moving up or down. It just tells traders on generality how much the particular stock moves. The plastic true range is a great tool and that can be utilized in the traders trading plan for more than setting stops. If traders are not familiar with setting stops, I recommend traders to do research. One place for excellent exclusive sources is at the System Trading Blog .

Traders use indicators in chary the stop loss by subtracting a multiple of the familiar True Range (ATR) from the entry price. For instance, I could take two times the ATR and subtract it from my entry price. If we look at the example, I just touched on, with a one dollar stock, an ATR value of five cents and a multiple of two the total is ten cents. Which, subtracted from our entry price of one dollar gives a stop loss value of 90 cents.

Before traders even enter a position, they should know where the selling point of the stock should be. If the share price doesn’t move in the traders favoured direction, but moves contra them, traders will know when to sell. Emotions are removed from the equation, and they simply follow what the stop loss dictates.

This is how most successful traders limit their losses. They know when they’re going to sell sooner they institute trading. notwithstanding their methods of enumerative this stop loss may vary, all traders have a stop loss in place. The stop loss is a crucial part of the traders trading system. Without it, even the best designed trading system can’t deliver profits.

Someone who reads the blog sent me this email:

Geoff,

I see you tweeted about CAW again.  What about that company attracts you?  I don't see that it is particularly undervalued and I am trying to understand what I am missing.

Sardar Biglari bought into the company. He will now have 2 board seats.

10-year average EBIT is about $5.75 million. So, the long-term average earnings would be about 50 cents a share after tax. Cash and securities is about $1.67. The stock trades around $6. That's maybe a little less than 10 times earnings (after breaking out the cash).

Here's the types of business they are in.

• Dietary Supplement: 33%
• Skin Care: 30%
• Oral Care: 20%
• Nail Care: 10%

Free cash flow tends to be equal to or greater than reported earnings. Cap-ex is virtually zero.

High management pay relative to the company's size hides how profitable the business is.

For example, David Edell and Ira Berman made $2.88 million in 2009. This is against - like we said - an average EBIT of about $5.75 million. So, we're talking more like $8 million+ in EBIT before these two get paid. Other executives are paid more what you'd expect the top folks at this kind of public company would normally make: $300,000 to $500,000.

I checked out the company's products at a local drugstore. Though there will always be lawsuits, I thought it was a decent space to compete in. In the past, I'd researched a couple companies with similar business models. They had better brands. But CCA Industries was much cheaper.

Given the circumstances, I felt Biglari's activism would lead to good things. 

It's coattail investing.

Talk to Geoff about CCA Industries (CAW) and Sardar Biglari

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