# Question for traders about stop losses?



## Realist (14 July 2006)

Okay.  So the ASX is down about 2% today..

Those of you that bought stocks yesterday with a 2% stop loss in place - does that mean your stop losses are getting triggered all over the place today?  If so does that not drag the market down even further, triggering more stop losses from other punters?

Okay, so if you see the DOW went down overnight say 2%, and the ASX is heading down - would it be wise to move your stop loss down a bit to say 4%. Because the last thing you want is your stop loss hit, your shares sold, you make a small loss, then your stock bounces up again tomorrow along with the ASX as a whole.

The reasoning I have is that the market's general feel may not reflect  "investors" opinions of your stock.  Your stop loss is there to protect you from your stock plummeting (say on release of poor results or poor drilling results), the market itself rarely plummets more than 10% in a day, and if it dips 2% and affects your stock that much it should be no reason to sell your stock.

Stop losses are there to protect you from your company plummeting not the ASX dipping - is that right?


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## mit (14 July 2006)

Yes, always, if my stop is hit. No stops have been hit today. Unless I am away from a computer I wont have a physical stop but usually wait until close before actually selling.

The only time I might not stop the stock is if there is a kangaroo tail. Where a stock goes through the floor and recovers within an hour or so.

If you play the game "I wont take my stop because today is a one off", what happens if there is another 100 point drop on Monday? Do you just say the same again that this is a one off and I'll sell on Tuesday etc etc. This is a failed trader in the making.

Also, you buy stocks because they are strong. You pick the stops because you think that once the level is breached the stock is no longer going to go up.

Today I have two green stocks, 6 that have dropped less than 1% and two that have fallen the same as the market.

The last two although they haven't hit their stop I wouldn't mind if they did so I could buy something that is strong enough to withstand market sentiment.

MIT


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## mit (14 July 2006)

Realist said:
			
		

> If so does that not drag the market down even further, triggering more stop losses from other punters?




You are correct and some of the more popular technical patterns come from common places where people put their stops. Once these spots are breached stocks can go into free fall. The opposite happens with Break outs.


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## professor_frink (14 July 2006)

> Those of you that bought stocks yesterday with a 2% stop loss in place




You won't find too many traders have a stop this close, but if they did, then yes stops will be getting hit and this in turn could send the market lower. For companies in the top 100, this wouldn't really have much of an impact on how far it falls though, unless a trader is selling 500,000 shares in bhp in one big hit 



> would it be wise to move your stop loss down a bit to say 4%.




No, this would not be wise at all.


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## It's Snake Pliskin (14 July 2006)

> Also, you buy stocks because they are strong.




Generally only if you are momentum trading. But what is strong? Strong in one time frame may be weak in another. So one can make use of counter trend opportunities, ineficiencies....



> The last two although they haven't hit their stop I wouldn't mind if they did so I could buy something that is strong enough to withstand market sentiment.




Take a discretionary stop and make use of the other opportunities being presented - purely valid.  

Hey Mit, where on the south coast are you?


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## It's Snake Pliskin (14 July 2006)

Realist said:
			
		

> Okay.  So the ASX is down about 2% today..
> 
> Those of you that bought stocks yesterday with a 2% stop loss in place - does that mean your stop losses are getting triggered all over the place today?  If so does that not drag the market down even further, triggering more stop losses from other punters?
> 
> ...




Simply picking arbitrary percentages is not effective nor efficient trading.
2%, 4%, 6% etc.


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## mit (14 July 2006)

Snake Pliskin said:
			
		

> Generally only if you are momentum trading. But what is strong? Strong in one time frame may be weak in another. So one can make use of counter trend opportunities, ineficiencies....




Granted. But I was taking the example as given. If a trader bought a stock yesterday with a tight stop he is going to expect it to perform better than the market. The fact that it didn't well maybe it is good that it is sold.



> Take a discretionary stop and make use of the other opportunities being presented - purely valid.




Yeah, but for my mechanical system optimized at the stop levels for a reason and I have been caught out before selling before the stop and the market flying. For discretionary trades then definitely I would be out on these shares. I do some very small discretionary stuff which is doing great in all this volatility, but unfortunately I have only 10% of the capital against it.




> Hey Mit, where on the south coast are you?




Between Berry and Nowra. Pretty nice. I think that Rosella is in a nicer piece of the South Coast but I need to be able to commute to Sydney.


MIT


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## Realist (14 July 2006)

Thanks guys.    

Okay say you bought BHP for $28.40 and MTN for 80c yesterday - what would your stop losses have been?

(pretending of course you did not know about todays falls)

They'd have been hit wouldn't they and you sold today?


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## Realist (14 July 2006)

mit said:
			
		

> Today I have two green stocks, 6 that have dropped less than 1% and two that have fallen the same as the market.




You are lucky, today the ASX beat me like a red headed stepchild.

Every single stock I have is bright red!


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## mit (14 July 2006)

Not that It looked like a buy but some common stops

Depending on the time horizon. Longer term it would be around $24.00. If I was going to be in and out in a few days to a week. The closer low is 28.43 and somebody might take that as a very tight stop which would have been stopped out. However given that the ATR is around 70c at the moment I would have put the stop at least 2 ATRs below yesterdays close so $27.75 so you don't get caught out by random market noise.

I was going to say that some people use moving averages for a stop but guess what a common moving average the 200 day MA crosses just below the 24.40 low (power of TA again).


Anyway with tighter stops (unless they are an absolutely beautiful setup) you expect to get stopped out more often cost of doing business.

MIT


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## mit (14 July 2006)

Realist said:
			
		

> You are lucky, today the ASX beat me like a red headed stepchild.
> 
> Every single stock I have is bright red!





It happens the other way enough. Deteriorated at the close however. Still two greens but the reds got redder.


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## Realist (14 July 2006)

mit said:
			
		

> It happens the other way enough. Deteriorated at the close however. Still two greens but the reds got redder.





ahh green, that's right.  I'd forgotten what colour it was again - I've seen a bit too much red recently.    

Maybe there is an advantage in being colour blind. Don't they confuse red with green?

A colour blind person may think my portfolio looks good?


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## cuttlefish (14 July 2006)

realist - I'm assuming you got the 2% figure from the 2% rule that the traders keep going on about. 

The 2% rule doesn't mean only make a 2% loss on a particular stock, what it means is only risk 2% of total capital on a particular trade.   

If you allocate 10% of your capital to a trade then that means you can have a 20% stop and still only risk 2% of total capital.  (20% of 10% = 2%).

So for example, if capital = 100K
2% of 100K = 2K

Allocate $10K to a trade on MTN at 80c. (12500 shares)

Allowed to risk $2K = 20% of the trade = are allowed to set stop at 64c and still only risking 2% of capital. (12500*.64=8000= $2k loss). 

So on a single trade the stop might be 20% below the purchase price, but still only risking 2% of capital.

But the 2% rule isn't used to determine the stop level - the stop level is set by using some technical analysis to determine where support is and putting a stop below that support so that if it breaks below support you sell before it free falls to the next support level below. But if that initial support/stop isn't within the 2% of capital range then the trade doesn't pass mustard and you can't enter it.


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## Kipp (14 July 2006)

ON the topic of stop losses.....
my bloody broker (Avcol) doesn't actually has a stop-loss system in place.  Can anyone recommend a budget broker than does?   Commsec?

I should of really looked into this earlier, procrastiation has cost me a little bit on some of my dogs...
Thanks


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## cuttlefish (14 July 2006)

yeah comsec has them.


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## Julia (14 July 2006)

Kipp said:
			
		

> ON the topic of stop losses.....
> my bloody broker (Avcol) doesn't actually has a stop-loss system in place.  Can anyone recommend a budget broker than does?   Commsec?
> 
> I should of really looked into this earlier, procrastiation has cost me a little bit on some of my dogs...
> Thanks




Can't you just place a limit sell order at the same time you buy the stock?
And then review it as required?

Julia


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## wayneL (14 July 2006)

Julia said:
			
		

> Can't you just place a limit sell order at the same time you buy the stock?
> And then review it as required?
> 
> Julia




Julia,

Your sell order will get taken out straight away, because the limit price is below the market.


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## sails (14 July 2006)

Kipp said:
			
		

> ON the topic of stop losses.....
> my bloody broker (Avcol) doesn't actually has a stop-loss system in place.  Can anyone recommend a budget broker than does?   Commsec?
> 
> I should of really looked into this earlier, procrastiation has cost me a little bit on some of my dogs...
> Thanks



Kipp, WebIress also has conditional orders with no additional charge from brokers like Morrison Securities and Trader Dealer (I believe E-trade charges for them through their WebIress platform).


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## Julia (15 July 2006)

wayneL said:
			
		

> Julia,
> 
> Your sell order will get taken out straight away, because the limit price is below the market.



Wayne

I should have been clearer.   
What I meant was why can't you just decide on the price at which you want to exit to protect yourself, whether it's a percentage of your capital, or a percentage of that trade, and place a limit sell order for that price at the same time ?

Julia


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## barry593 (31 July 2008)

Where are stoploss (or conditional) orders held??
On the broker's platform (server) ??
What about Commsec ??
What about IB (Interactive Brokers) ??
(I am looking at selecting a broker)


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## tech/a (31 July 2008)

On their server I would think.

I use IB.
A real pain to set up but once up and running there is nothing better in my view.
Brokerage and trading flexability are second to none.


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## barry593 (31 July 2008)

tech/a said:


> On their server I would think.
> 
> I use IB.
> A real pain to set up but once up and running there is nothing better in my view.
> Brokerage and trading flexability are second to none.




Thanks Tech
Couple of questions...
Can it be programmed as a trailing stop.. ie follow the price up??
Why is it a pain? complex setup or what??


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## tech/a (31 July 2008)

barry593 said:


> Thanks Tech
> Couple of questions...
> Can it be programmed as a trailing stop.. ie follow the price up??
> Why is it a pain? complex setup or what??




No.
You can and I do alter my stops daily normally in the morning at a pivot,on a timeframe I'm following.

Setup is complex and security and ID take time.
But having said that they are very thorough which is a good thing.
Security is excellent so I feel my account is secure.
Once up and running is very user friendly.
I dont trade complex trades like options (complex to me!) but you can trade anything from Futures to options short/long,and most bourses in the world.


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## Boggo (31 July 2008)

I used to have a set and forget attitude towards stop loss settings.
From my (limited) experience I now believe that each stock has to have a slightly different set of rules, the only consistent area is the initial stop when a trade goes the opposite to what you expect.

The initial stop is usually an obvious point, ie. possibly a recent low etc.
How the stop is managed from there is where it can start to vary from trade to trade.

The number one aim for me is to get the stop up to break even while staying a safe distance from the actual market (numerous small profit trades can be easily eroded by one loss).

I have attached a couple of different charts of MCC
The first chart shows a 2.4 times ATR (metastock formula, [Int(HHV(C-2.4 * ATR(10),15)*100)/100]).
Testing this formula based on the close being below the stop is different to having to set a conditional stop with your broker software.

In this example I got stopped out on long spike down at close to break even $.
I actually set the conditional sell order to $10.49, effectively I was "trailing" the trailing stop loss.
To avoid being taken out during the day and only stopped out on the close would mean I would have to limit the activation period of the contingent order to the last few minutes of the trading day, visualize the potential risks associated with that procedure for a minute.

In my backtesting this was a very profitable trade based on being stopped out when the CLOSE was below my trailing stop, reality... just broke even.

The second chart shows the new entry, in this case for the entry the buy quantity is determined by the distance between the buy point and the stop point along with the amount you are prepared to lose on a trade if it goes wrong.

The aim as I mentioned earlier is to get the stop up to the break even point while giving the stock enough room to move ( I have got that now on this trade).

I didn't intend to waffle on with this post, basically what I am trying to say is that there is no magic stop that works on everything and implementing backtesting in the real world is not always going to work, its all part of the education process I guess!
(Education = behaviour modified by experience)

My 
Mike


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## Porper (31 July 2008)

Boggo said:


> The aim as I mentioned earlier is to get the stop up to the break even point while giving the stock enough room to move ( I have got that now on this trade).
> 
> I didn't intend to waffle on with this post, basically what I am trying to say is that there is no magic stop that works on everything and implementing backtesting in the real world is not always going to work, its all part of the education process I guess!
> (Education = behaviour modified by experience)
> ...




Hello Boggo,

Is that MT predictor software you are using? If so how do you find it.I know it counts Elliot waves for you, but I am more interested in how good the scans are .


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## MichaelD (31 July 2008)

Boggo said:


> In my backtesting this was a very profitable trade based on being stopped out when the CLOSE was below my trailing stop, reality... just broke even.




Obvious question - why would you use an intraday stop then? (I have never found an intraday stop on any timeframe to do anything but hurt system performance).


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## Boggo (31 July 2008)

Porper said:


> Hello Boggo,
> 
> Is that MT predictor software you are using? If so how do you find it.I know it counts Elliot waves for you, but I am more interested in how good the scans are .




Yes it is Porper, I have been using the earlier version for a few years now. I find the scans very good, you can adjust the parameters if you wish.
It does assume that you have a working knowledge of Elliott Wave including Fibonacci and Alternate price projections etc.
As with any software it gives you potential candidates, the rest is up to you.



			
				MichaelD said:
			
		

> Obvious question - why would you use an intraday stop then? (I have never found an intraday stop on any timeframe to do anything but hurt system performance).




How would you set your stop if you were not going to have access to the market tomorrow Michael ?


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## Porper (31 July 2008)

Boggo said:


> Yes it is Porper, I have been using the earlier version for a few years now. I find the scans very good, you can adjust the parameters if you wish.
> It does assume that you have a working knowledge of Elliott Wave including Fibonacci and Alternate price projections etc.
> As with any software it gives you potential candidates, the rest is up to you.





Thanks Boggo.I have heard there is a intra day version coming out in September, so may wait until then.The version that came out end of June is semi-real time ? and supposed to be good.


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## MichaelD (1 August 2008)

Boggo said:


> How would you set your stop if you were not going to have access to the market tomorrow Michael ?




I would not trade a system that required me to be in such a position - I aim NEVER to have a stop in-market.

However, if I were...

1. EOD stop loss hit yesterday.
2. I would normally close on the next OPEN.
3. If I were unable to be there at the next OPEN, I would set an AT LIMIT order for as far below the closing price as I could.

The idea here is that I most likely will get filled on the open. If the open gaps up (as it often does on a down day) then I will take advantage of the gap up.

A contingent order of your style guarantees a low fill since it will always throw away the potential advantage of an opening gap up.

One further note: I have backtested entering/exiting on the OPEN/CLOSE and have determined that for my EOD system that exiting on the OPEN offers the least drawdown overall so is the best time to exit for me within the limits of what I can test.


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## banjosmyth (3 August 2008)

Realist said:


> Okay.  So the ASX is down about 2% today..
> 
> Those of you that bought stocks yesterday with a 2% stop loss in place - does that mean your stop losses are getting triggered all over the place today?  If so does that not drag the market down even further, triggering more stop losses from other punters?
> 
> Okay, so if you see the DOW went down overnight say 2%, and the ASX is heading down - would it be wise to move your stop loss down a bit to say 4%. Because the last thing you want is your stop loss hit, your shares sold, you make a small loss, then your stock bounces up again tomorrow along with the ASX as a whole.




Hi Guys

I believe that there can be some big problems with stop losses.  There is nothing worse than being stopped out only to see the share price quickly rally again.  

Depending on what strategy you are using it can sometimes be better to insure yourself against big losses by buying put options.  This works well if you are dealing with relatively large amounts of money or if you are highly leveraged (or using CFD's).  

The beauty of using puts instead of stop losses is 
-you will avoid being stopped out when your share price just dips below your stop loss
-You can protect 100% of your portfolio by buying at the money puts 
- If the share price gaps this doesn't negatively effect your put options whereas your stop loss can end up meaning very little!


This obviously doesn't suit every strategy but it can be a great option at times!

Cheers 

Banjo Smyth


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## Paladin (3 August 2008)

Realist said:


> Okay.  So the ASX is down about 2% today..
> 
> Okay, so if you see the DOW went down overnight say 2%, and the ASX is heading down - would it be wise to move your stop loss down a bit to say 4%. Because the last thing you want is your stop loss hit, your shares sold, you make a small loss, then your stock bounces up again tomorrow along with the ASX as a whole.




Actually, the last thing I'd want is to not have a stop loss in place and to see the price dive again. Because a lot of stocks, especially small cap ones, trade very differently to the ASX. I'm not really watching the ASX as a whole on a daily basis at the moment, because at the moment I don't have $ in BHP, Rio, financials and so on that disproportionately affect the ASX.

For me (being a complete newbie, but having been playing with small parcels to learn the ropes recently - and not having hedging strategies like options in place yet) being unemotional about stops, and not changing a strategy once I've entered in to a trade (unless there's a very good and logial reason to do so) is becoming more and more important. Two weeks ago, I bought a stock on an uptrend and immediately set a trailing stop so that I'd be slightly better than b/e if it triggered worst case and book some profit best case. It's a volatile stock, and trying hard to find its support/resistance levels in a new zone it's entered into. The stock went up, not enough though for my trailing stop to adjust up, and then down she came again. I really had to struggle with not adjusting the stop because I like the company and thought it might just be a daily glitch, but decided to let discipline win out over optimism. So, next day on open, off the stop went. Saved me from about a further 5% hit on the stock over the next few days, I returned a small profit after brokerage, and now I'm monitoring to see when she is trading well again so I can trade with the trend a second time. So I didn't make a lot of dough, but I think I learned a good lesson. 

And as for online brokers, etrade (who I use) allows you to set stops, trailing stops and so on really easily - and add other conditional indicators like volume so that if you're playing with an illiquid stock, you don't get caught out on small noises.

Anyway, like SGT Schultz I know NUZZINK, but lord knows I've drained enough info out of this site that I'm desperately trying to put some back in where I can.


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## tech/a (4 August 2008)

banjosmyth said:


> Hi Guys
> 
> I believe that there can be some big problems with stop losses.  There is nothing worse than being stopped out only to see the share price quickly rally again.
> 
> ...





90% of the market doesnt have options attached to the share.


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## vast524 (11 August 2008)

I was wondering then if you use intra day stops or wait till the day is finished?
Does the stop value vary from person to person. Or do most traders use a 2% of there overall portfolio?
If I had a 10% stop on a 30c stock and it dropped to 26.5c during the day. Should I sell immediately or wait till the day is finished and then sell either in the post 4:00pm slot or on opening?
It can be hard to know if the stock is being oversold or the sentiment has changed and it will continue down.
Thanks for a very interesting topic
Regards


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## Boggo (11 August 2008)

tech/a said:


> 90% of the market doesnt have options attached to the share.




Jamie forgot that bit


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## cordelia (12 August 2008)

vast524 said:


> I was wondering then if you use intra day stops or wait till the day is finished?
> Does the stop value vary from person to person. Or do most traders use a 2% of there overall portfolio?
> Regards




I have tried various approaches to placing stops....

I NEVER move my stop down......you may as well not have one if you do that.....

I have various criteria that I review everyday which I use to manage my trades..If I don't like the way things are going I close out my position rather than hope my stop isn't triggered....

In regards to the  2% rule..this is based on risking 2% of your total portfolio per trade....calculated as risk per share...someone correct me if I am wrong

If you have a $100000 portfolio the most you can risk is $2000....

So the difference between your entry price and your stop is the risk...

ie: your entry @ .20c stop @ .18c = .02 per share (just an example)

Therefore if you divide $2000 by .02 you can buy 100000 shares....

The further your stop is away from your entry the less shares you can buy....So there's a trade off between the number of shares you can buy (and potential gains) against the movement in price....

You need to work out where the best place to put your stops is and  go from there.....that's the tricky part....

It pays to read some of the material on risk management regarding stops and position sizing before entering a trade....


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