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Today’s lesson: Don’t get lazy about setting stops

Jeff BishopJeff Bishop ·

Today is the 30th anniversary of Black Monday, the stock market crash of 1987 that saw the Dow Jones Industrial Average lose 508 points – 22.6 percent of its value – in a single trading session.

I was 12 at the time, so I can’t share war stories with you.

I can share the concern I have right now at a time when the market is so lacking in volatility that a decline of 4 or 4.5 percent – the declines the Dow saw on the two trading days preceding Black Monday – seems impossible.

The lack of volatility has a lot of traders feeling like they don’t need to stick to stop losses, so they aren’t putting them in place. They’re saving themselves time and effort because they are not worried that the market will run away from them; they figure they will have time to get out if we see a downturn.

What Black Monday showed us, both because of its huge downward action and also its fast rebound, is that the market can decline with surprising speed and magnitude. Right now, I don’t see a crash happening, but I do think that when the market finally has a day when it drops 3 percent intraday, that small decline will trigger something much bigger and we’ll see a flush of 5 to 8 percent pretty quickly.

The market can be so nice for so long, and then can be cruel to everyone all at once. That hasn’t changed, and no one should be lulled to sleep just because there’s no volatility now.

Use the anniversary of the crash as a reminder that stops matter. They may not save you anything today or soon, but someday they will protect you; don’t be lazy or careless between now and that someday or you will have a story about the next market crash, and it won’t be a tale that you’re proud of.


Jeff Bishop is lead trader at TopStockPicks.com, and the co-founder of RagingBull.com. He runs short-term trading strategies, using stocks, options and leveraged ETFs.

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