a serious, well considered effort on the part of far-sighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from 10 to 20 points above present prices.

In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market.

CHAPTER X.

*THE OPERATION OF STOP ORDERS.

A correspondent inquires: "My brokers advise me to protect my transactions by stop orders. It seems to me that stop orders may be good for brokers by giving them commissions, but they make customers take unnecessary losses. Do you advise speculators to give stop orders?"

Proof on this point is afforded by taking a large number of fluctuations and seeing how the average works out. We believe that for the margin trader, and especially the trader who operates rather more largely than he ought on the margin that he has, stop orders are wise. There are, however, many qualifications which should be kept in mind.

If a man is trading as a semi-investor, using 50 per cent. margin, depending on values for his profit and operating in harmony with the main tendency of the market, we do not think a stop order desirable. To explain this a little more fully: Suppose the movement of averages shows that the market is in a rising period, such periods usually covering several years with only temporary reversals in direction. Suppose that an operator finds that a certain stock is earning an abnormal percentage on its market value, or, in other words, is intrinsically cheap. Suppose on the occasion of a temporary setback this stock is bought to be carried for months if necessary until the price has

*Dow's Theory.

risen to approximately the level of the value. A stop order is folly in a case of this kind with anything like fair margin.

But, suppose a trader, having a margin of two or three thousand dollars, wants to trade in and out of stocks without regard to values, but being governed by points or by impressions of what the general market is going to do. Experience has shown that such a trader will, in the end, profit by putting a stop order about 2 points from the price at which he goes in. If there is advice that a stock is going up and it instead goes down 2 points without some obviously good reason for such a decline, the advice was not good, and the quicker the speculator lets go the better.

It often happens that when a stock moves two points it moves more, and it is a peculiarity of the human mind to disregard a small loss, but to get frightened and take a large loss just when wisdom would call for averaging a purchase.

Thousands of traders have said at two points loss that they would see that particular transaction through if the stock went to nothing, only to decide after it had declined ten points that there was good reason for believing that it would decline ten more and acting accordingly. The experience of most traders is that the small losses occasioned by stop orders have a tendency to check their trading with a small aggregate loss, while the practice of letting a loss run not infrequently makes a loss so large that trading comes to an end because the speculator has no more money:

The maxim "let your profits run, but cut your losses short" has received the approval of most of the great stock operators. The authorship of the maxim has been credited to a dozen people, and most of them would have been willing to father it, although the great fortunes in stocks have not usually been made by people who give stop orders. Their opinions that stop orders were wise was based on their observation of people who tried to trade with insufficient capital, to whom stop orders especially apply.

The great profits in stocks have almost invariably been made by people who saw the tendency of events clearly, and who then bought a large amount of stock which they thought certain to get the results of great increase in prosperity. Such stock has either been paid for outright or very heavily margined, and then it has been held for months or years until great profits accrued.

Take the opportunities that have occurred in the last six years, or since 1896. Any one of from twenty to forty stocks could have been bought around 20 and sold above 80, and in at least half the cases above par, within that time. Such great opportunities do not come every year, but there are few times when some stocks cannot be pointed out as being lower in price than in value and as entitled to advance.

In a close speculative sense, a stop order is often useful. Stocks may be bought just when a reaction is setting in. In this case, it is frequently wise to take a quick loss on the theory that the reaction is likely to be 5 or 6 points, and that the stock can be recovered with a net saving of

two or three points. A stop order is of use to out-of-town customers, because sometimes the market moves a good deal before a broker can communicate with his client and get an order to act. Stop orders are often valuable on the short side of the market, because a scare of shorts after considerable decline sometimes brings a very rapid rise, which runs away with all the profits that have accrued.

Customers who give stop orders should, however, understand exactly what they mean. A customer who, being long of Union Pacific at 105, should give an order to stop at 103, would in effect be saying to the broker: "Whenever Union Pacific sells at 103, sell my stock immediately at the best price obtainable."

If the best price obtainable were 102 or even 101, the broker would still be within his rights in executing the order. Hence, in giving stop orders, thought should be taken as to the size of the market in the stock. In Union Pacific, for instance, a stop order ought to be executed within 1% or 14 per cent. of the stop order price, except in cases of panic, but a stop order in Lackawanna or Chicago & Eastern Illinois or in some industrial stock would be very dangerous, because no approximate idea could be formed as to what price would have to be accepted.

Stop orders should not be given in any case in stocks of very limited market. In other stocks, their value will be found to depend largely upon the methods employed by the trader himself.