Today's article isn't really a screen (although I do have one at
the end).

I want to talk about something that I believe is critically
important in light of what's been happening in the market.

And that's about managing your risk -- using stops, cutting your
losses -- all of that stuff. Not a fun topic, but probably one
of the most important for right now.

What's interesting is that nobody ruins their portfolio when the
market is going straight up. It's when the market goes down that
people get into real trouble.

But ironically, it's when the market is going up that a lot of
these bad habits are created.

The problem is that even bad decisions are oftentimes rewarded
in a bull market. But when the market is going down, there's no
mercy for bad decision makers. Sitting on losses in hopes of
them coming back can ruin your portfolio as they grow bigger.

I like using a 10% stop loss rule because it's kind of a tit for
tat. If you lose 10% on a trade, you only need a little bit more
than 10% to get that money back (11.1%).

But if you lose 20%, you now need a 25% gain to get that money
back. And it gets worse as it goes down.

If you lose 30%, you now need nearly a 43% return to get back to
where you were.

And if you lose 50% -- you now need to pull out a 100% return to
get back to even. (And if you're so slick that you can pull a
100% return out of your hat at any time, why did you just get
clobbered for a 50% loss?!)

So I think it's important to keep your losses small. Why do so
many people find it hard to cut their losses short? I think a
lot of people hate taking losses because they fear that if they
get out, and the market goes back up, they're going to miss out
on the move.

Like somehow, they’re going to get out and it’s going to go
up a million percent without them. First off, that's nonsense.
Just give yourself permission to get back in. If the stock does
go back up and a big move ensues, the 10% you gave up won't
really matter.

Of course, you don't want to get back in the moment it goes a
tick above where you got out. Give it some proving room. But if
there's a compelling reason to get back in, do so.

Don't hang onto losers for fear that they'll all of a sudden
become big winners once you get out. You can always get back in.
But every losing trade begins with the investor believing that
it was going to be a big winner too " otherwise they wouldn't
have made that trade in the first place.

In stocks, nobody is 100% right. So knowing that "take your
losses when a trade is not working out and move on to another
higher probability trade.

Plus, it can help you stay focused. By keeping your losses
small, you won't get gun shy on your next trade.

Stock Screen One of the ways to minimize your downside, in my
opinion, is to find stocks outperforming the market.

A simple screen I've been running is to look for the top 100
companies that have outperformed the S&P 500 the most.

I add in the Zacks Rank and price and volume constraints (> $5
and > 100,000 shares) to first narrow the universe down. But
then I'm looking for the top 100 stocks with the greatest
Relative Percentage Price Change over the last 24 weeks.

And you get a lot of interesting companies across all different
sectors and industries. Here are 5 that came through this list
for Tuesday, 9/16/08:

FRED Fred’s Inc. APSG Applied Signal technology USNA USANA
Health Sciences, Inc. GIII G-III Apparel Group, Ltd. FSYS Fuel
Systems Solutions, Inc.

About the author:
Kevin Matras is the Research Wizard Product Manager and weekly
contributing Editor at Zacks Investment Research who creates and
writes the Zacks Commentary Screen of the Week. For more
information, visit http://www.zacks.com.