# Stop Losses - when to use?



## bomz_21 (20 September 2017)

Hi all, forgive me if this is too beginner for this forum.
I tried reading up about 'stop losses' or conditional trades where you can sell shares if they reach a certain price (falling stop loss).  I like this idea to maybe catch your savings should the market drop suddenly and you lose all your capital gains. Though are there any catches? Are there any reasons you wouldn't set these up to slightly below your purchase price?

Thank You


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## galumay (20 September 2017)

Depends a lot whether you are trading or long term investing. I imagine trading they are just about a necessity (others in that field will clarify I am sure), for me as a long term invester they would be counter productive. I dont want to sell out when prices drop, in fact if I am sure of my analysis and understanding of the business I probably want to buy more!

Short term volatility is just noise to me, very different to a trader who is trying to profit from it.

As examples of the catches you ask about, 2 of my biggest multi baggers would have been exited if I had used stop losses

I am sure some of the traders on ASF will give you much more detailed explanations of the pros and cons from their perspective.


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## pixel (20 September 2017)

bomz_21 said:


> Hi all, forgive me if this is too beginner for this forum.
> I tried reading up about 'stop losses' or conditional trades where you can sell shares if they reach a certain price (falling stop loss).  I like this idea to maybe catch your savings should the market drop suddenly and you lose all your capital gains. Though are there any catches? Are there any reasons you wouldn't set these up to slightly below your purchase price?
> 
> Thank You



Hello and Welcome, bomz_21

IMHO, the simple answer, especially for a beginner, is
*Thou shalt honour thy stop loss and and keep it Holy, lest thy capital disappear in the bottomless pit and be eternally lost.
*
Take a look at the reasons why you bought a share in a company:
You did your research, found a company  that you thought was a reasonable investment *at this time and price*, and you were prepared to pay, say, $1 a share.
Q: Why did you buy? A: To let your capital grow faster than under the mattress or in a bank account (almost the same interest, these days.)
Roll forward in time, and you're likely to be confronted with either of two scenarios.
1. The share price does rise as expected, and your capital grows in value. *Let it ride.*
2. The share price stagnates and turns down, and you're becoming poorer by the day.
Will you sit idly and let that happen? Or do you take action to keep your wealth as close to today's (high) level as possible?
Where I sit, the answer is simple: Sell at today's price before tomorrow's price is even less.

So much for the need to "Keep the Stop-Loss Holy".

The only variation is now the "How".
You mentioned a tick below your buy price. In the life of a company's share, what is significant about *your *buy price? Answer: Nothing! The Market moves a share price this way or that solely depending on market forces that you may be able to observe after they have happened, but where you don't feature. (Exceptions, such as Warren Buffet or James Packer, don't include beginners or small retail traders.)
Therefore, it is an unreasonable approach - IMHO - to take any notice of my buy price when determining when it's time to sell.
see http://rettmer.com.au/TrinityHome/Trinity/Musings.htm#onshareprices

In setting a (trailing) stop level, the only "personal" factor is your risk tolerance, meaning the percentage you're prepared to hand back to the Market before taking back your capital. Do remember that your capital is the total value of your share parcel based on the most recent trade. Again, it does not depend on the price you paid, but solely on the price the last buyer was prepared to pay had you been sitting in the sellers' queue.

In order to determine a sale price, I wrote an algorithm for a "trailing stop". It simply calculates the stop at a level when the share price has dropped by more than an average swing from the most recent High. (The algo is written in Pascal language, which won't help you much in standard charting packages.)
If the software you use has a "Keltner Channel", you might start studying that one, It's based on the same idea, but because of its age misses some of the adaptability and flexibility that a fast computer allowed me to incorporate.

PS for galumay: Every trailing stop algo should always contain the reversal signal. Mine shows buy (up) arrows and sell (down) arrows, and even if I stopped out and then find the uptrend resumes, it will quickly give me the "Buy Back" arrow. See example below:


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## Gringotts Bank (20 September 2017)

For reversion - use a price stop when you can reliably identify a hard profit target, thereby managing your RRR.  Otherwise a time stop (n bars) and use fixed position sizing.

For momentum - trendline stop or trailing.


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## PZ99 (20 September 2017)

bomz_21 said:


> Hi all, forgive me if this is too beginner for this forum.
> I tried reading up about 'stop losses' or conditional trades where you can sell shares if they reach a certain price (falling stop loss).  I like this idea to maybe catch your savings should the market drop suddenly and you lose all your capital gains. Though are there any catches? Are there any reasons you wouldn't set these up to slightly below your purchase price?
> 
> Thank You



There is one catch. You buy something for $1.00 - and it climbs to $1.20
You set your stop loss at $1.10

Next day the stock opens at 0.90c after a bad report but recovers to $1.05
You've lost out because your stop loss trigger acted at 0.90c and you've lost your asset.

Of course if the stock falls further during the day you can back your investment back and have some beer money in the deal 

P.S. Never done a stop loss myself so happy to be corrected if that's wrong. Cheers.


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## mcgrath111 (20 September 2017)

I don't think stop/losses apply for fundamental holders. For example, if you did your analysis, found that WES was a buy because of X,Y & Z so you paid $40 for it.
The next day it rises to $42 (yipee), the next day it falls back to $40 and the day after that it falls to $30 (Off no news).
You had your stop loss set @$31 and your shares have been sold. 
But based off no news, you sold off just because of the price fall. 
When you have a company that is now cheaper but has the same prospects. 

Stop losses hold very high importance for traders though (most I believe close positions end of the day? To avoid the situation you mentioned -  correct me if im wrong)


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## galumay (20 September 2017)

pixel said:


> PS for galumay:




As I figured, its really only relevant to traders and Pixel gives a great explanation of how he uses stops. I also suspect they are something more likely to be used by those who believe that charting historical trends has some useful purpose and predictive ability. 

I guess the question from here is really in what context the OP was asking the question, trading or investing.


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## bomz_21 (20 September 2017)

Thank you everyone.
Some interesting ideas here.

It's almost as if it's not worth putting a stop loss unless you've already gained some capital growth in a stock & can afford to put a stop loss in place to save a dramatic fall.

Thanks!


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## CanOz (20 September 2017)

galumay said:


> As I figured, its really only relevant to traders and Pixel gives a great explanation of how he uses stops. I also suspect they are something more likely to be used by those who believe that charting historical trends has some useful purpose and predictive ability.
> 
> I guess the question from here is really in what context the OP was asking the question, trading or investing.




I think peter2 has proven he can beat the equity indices and most buy n hope types hands down....with stops. Everyone that is successful manages risk, stops are only one method.


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## Modest (20 September 2017)

Think about it for a second what is a stop... It is a point where you're exiting the market, to exit someone needs to either buy or sell for you to get a fill. So for instance, on a drop you're stopped out of a long, to exit that long someone needs buy. Keep this in your mind.

When I first started trading it was all about setting max loss, 1% of your account - but that's the dumbest **** ever. When you get to _the_ point you realise you're minimum or maximum stop loss DOES NOT MEAN SQUAT because it all depends on context and if you can't read context you'll just bleed 1% of your account a hundred times over.


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## pixel (21 September 2017)

galumay said:


> As I figured, its really only relevant to traders and Pixel gives a great explanation of how he uses stops. I also suspect they are something more likely to be used by those who believe that charting historical trends has some useful purpose and predictive ability.
> 
> I guess the question from here is really in what context the OP was asking the question, trading or investing.



Two points need to be made here, galumay

1. Charts do not have predictive abilities. Charts show trends, support and resistance. From those, and with a certain degree of experience and ability to recognise patterns, one can assess the odds of a chart moving in this direction or that. 

2. Whether I'm investing for a long time frame, or trading swings that are over within days or sometimes minutes, the purpose is invariably to increase my net wealth. 
Consider an investor who bought 10,000 TLS for $6 each. How long would that person have to wait for the dividends to cover the difference to today's $3.60? My (and _Phil Carret’s_) point is this: Regardless how much you paid for TLS, once it fell from $6.50 below $6 and on through $5.50, ... the smart action was to sell and take the cash to buy a share that has a greater chance of moving in the other direction. 
example: A year ago, $50,000 would buy you 10,000 WOR. Leave the money tied up in 10,000 TLS, and your 60 Grand are now worth $36,000 plus change from dividends. Convert it into 10,000 WOR, and you're now sitting on $130,000.

It's all too easy to find anecdotal evidence by citing Peter2 or Warren B, who have a knack of picking stocks that never go down. They are the 0.1% exceptions in a pool of Millions of retailers and beginners. It's the latter that have to learn how to admit to themselves "it ain't working as intended" and switch to Plan B. Otherwise they swell the ranks of people who leave the Share Market with a small fortune - after entering it with a big fortune.


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## Modest (21 September 2017)

pixel said:


> Two points need to be made here, galumay
> 
> 1. Charts do not have predictive abilities. Charts show trends, support and resistance. From those, and with a certain degree of experience and ability to recognise patterns, one can assess the odds of a chart moving in this direction or that.




Charts have 99% predictive ability.

For proof just look at my Futures thread, don't mean to brag.

Charts are the key to all of this.

No exel required.

No AmiBroker Required.

I post this post at 11:33PM Perth Time.

Crude OIL (CL Futures) I anticipate reaching 52.00 as overall target

If Charts are useless... Ignore me 

20/09/17


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## Boggo (21 September 2017)

pixel said:


> Two points need to be made here, galumay
> 
> 1. Charts do not have *predictive* abilities. Charts show *trends*, support and resistance.




To me a trend is predictive.

_pre¦dict|ive_
_[prɪˈdɪktɪv]_
_ADJECTIVE_


_relating to or having the effect of predicting an event or result: _




Modest said:


> Charts have 99% predictive ability.
> 
> For proof just look at my Futures thread, don't mean to brag.




And my TLS thread pixel. I could bore you with quite a few more where the trend has a predictive expectation.


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## Triathlete (21 September 2017)

Modest said:


> Charts have 99% predictive ability.
> 
> For proof just look at my Futures thread, don't mean to brag.
> 
> ...



I have to agree understanding how to read a chart will most definitely put the odds of being successful in your favour....


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## galumay (21 September 2017)

Modest said:


> If Charts are useless... Ignore me




Done.



pixel said:


> wo points need to be made here, galumay




Ok, its my own fault for bringing the issue of charts up, and with giving an investor's view point. Lets just leave it at there are different approaches to being involved in markets, we have almost no overlap in our world views, strategies and understandings - and I dont think any amount of discussion will change that.


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## CanOz (21 September 2017)

Modest said:


> Charts have 99% predictive ability.
> 
> For proof just look at my Futures thread, don't mean to brag.
> 
> ...




Last point on charts....by Peter Brandt


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## Gringotts Bank (21 September 2017)

Modest said:


> because it all depends on context and if you can't read context you'll just bleed 1% of your account a hundred times over.




No one ever says what they mean by context.  I just have to assume it means political factors, fx and interest rate markets, other correlated markets, cyclones and so on.  Because if it meant larger time frames then you'd say 'larger time frames'.


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## CanOz (21 September 2017)

To illustrate why we use stops, here is a strategy that buys volatility in oversold conditions.....Its long only for indices that are by thier nature long biased. Here is the results without stops. 100% Win Rate, equals buying and holdind the index since january 01 2012.


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## CanOz (21 September 2017)

The Problem with buying and holding is the drawdowns. This strategy had an open 85%+ loss to cope with. Not many people could handle that, thier tolerance for risk is more likely around the 20-30% drawdown or less.


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## CanOz (21 September 2017)

Gringotts Bank said:


> No one ever says what they mean by context.  I just have to assume it means political factors, fx and interest rate markets, other correlated markets, cyclones and so on.  Because if it meant larger time frames then you'd say 'larger time frames'.




It could include larger times frames. Essentially your right, its the themes, how crowded the trade is, all of your factors as well.


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## Betavegeta (21 September 2017)

Stop losses are good in theory but in reality they make you prone to getting stop hunted by large institutions which are in a position to influence market direction.


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## Gringotts Bank (21 September 2017)

Betavegeta said:


> Stop losses are good in theory but in reality they make you prone to getting stop hunted by large institutions which are in a position to influence market direction.




Everyone uses stops, whether they realize it or not, otherwise they end up with a draw down chart like canoz posted.  Hard or soft, visible or not - it's still a stop.


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## Wysiwyg (21 September 2017)

Betavegeta said:


> Stop losses are good in theory but in reality they make you prone to getting stop hunted by large institutions which are in a position to influence market direction.



Better veg. eater, the cost for an organisation to trip a stop in order to cause financial loss would be phenomenol. They would have to sell down or buy up and thus incur losses of their own when price reverses.


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## tech/a (21 September 2017)

Only a few here in my view get it!

If discretionary

Context 
The ability to read chart and volume 
Is paramount if you want extra ordinary results.

Set and forget systems trade 
Better than average results for those good at it.

Trading without a stop can be very profitable if your scalping range.
But work on a long timeframe and it's like driving a bus without brakes.


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## galumay (21 September 2017)

Gringotts Bank said:


> Everyone uses stops, whether they realize it or not, otherwise they end up with a draw down chart like canoz posted.  Hard or soft, visible or not - it's still a stop.




Thats taking semantics to a level that reduces discussion to nonsense. That is if I am correct in that you appear to be implying that any sell order is some form of "stop loss"?


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## tech/a (21 September 2017)

galumay said:


> Thats taking semantics to a level that reduces discussion to nonsense. That is if I am correct in that you appear to be implying that any sell order is some form of "stop loss"?




Why wouldn't it be?


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## Betavegeta (21 September 2017)

Well if people insist on using stops at least don't base it on any obvious moving averages or any commonly accepted technical trading signals that almost *every* trader knows.

To be safe just use a mental stop and move it a few price steps below what you thought was a good stop initially.


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## tech/a (21 September 2017)

Betavegeta said:


> Well if people insist on using stops at least don't base it on any obvious moving averages or any commonly accepted technical trading signals that almost *every* trader knows.
> 
> To be safe just use a mental stop and move it a few price steps below what you thought was a good stop initially.




If that is the case wouldn't you be able to use that for your own trading advantage?


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## galumay (21 September 2017)

tech/a said:


> Why wouldn't it be?




Really?! This is like the mad hatter's tea party, if words can mean just whatever we want them to mean!

Seriously, lets keep the discussion slightly rational. "Stop Losses" as per the OP's query are not the same thing as a normal order to sell.


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## tech/a (21 September 2017)

If I I'm trading a range of say 10 points long or short and I have a buy 
3 points off a support level and a sell at 7 points above that 
The exit would be 3 points below the buy and the sell would be a target stop

Label it what you like it does the same thing 
Gets you out where you want to.

Semantics


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## galumay (21 September 2017)

tech/a said:


> If I I'm trading a range of say 10 points long or short and I have a buy
> 3 points off a support level and a sell at 7 points above that
> The exit would be 3 points below the buy and the sell would be a target stop
> 
> ...




I dont even know what you are talking about!! (pardon my ignorance of trader's quack!)

But a "Stop Loss" is defined as an order to sell in the future at a specific price, to my knowledge no one has previously tried to claim that a normal sell order is a form of "Stop Loss". Its certainly not in any online definition of "Stop Loss" that I can find.

As I said, its mad hatter's tea party stuff.


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## tech/a (21 September 2017)

Had to read back to gain context.

Now I understand 
You believe in averaging down as a long term investor

Carry on


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## cynic (21 September 2017)

galumay said:


> I dont even know what you are talking about!! (pardon my ignorance of trader's quack!)
> 
> But a "Stop Loss" is defined as an order to sell in the future at a specific price, to my knowledge no one has previously tried to claim that a normal sell order is a form of "Stop Loss". Its certainly not in any online definition of "Stop Loss" that I can find.
> 
> As I said, its mad hatter's tea party stuff.



One of the things I have often noticed, is the human tendency to conflate just one, of multiple possible expressions, for a single concept, with the concept itself.
This can give rise to some confusion to those having chosen from amongst the other possible expressions for that same concept.

On this occasion, risk mitigation, appears to be the concept, and the stop loss order, is but one, of the multiple available expressions!


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## galumay (21 September 2017)

tech/a said:


> ....Carry on




Phew! I was starting to feel like Alice!


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## cynic (21 September 2017)

Wysiwyg said:


> Better veg. eater, the cost for an organisation to trip a stop in order to cause financial loss would be phenomenol. They would have to sell down or buy up and thus incur losses of their own when price reverses.



Couldn't they just spoof, layer, or ratchet the market, like so many professional market manipulators have been known to do in years gone by?


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## Wysiwyg (21 September 2017)

cynic said:


> Couldn't they just spoof, layer, or ratchet the market, like so many professional market manipulators have been known to do in years gone by?



Those practices do happen but there is a disincentive. My reply to the context of the post is still an individual is extremely unlikely to have their stop triggered by an organisation.

"Law360, New York (August 8, 2017, 8:39 PM EDT) -- The Seventh Circuit’s unanimous decision Monday to uphold the conviction of Michael Coscia for a market manipulation tactic known as “spoofing” is a landmark ruling that removes questions about the constitutionality of the law banning such conduct, strengthening government efforts to crack down on the practice, experts said Tuesday."


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## cynic (21 September 2017)

Wysiwyg said:


> Those practices do happen but there is a disincentive. My reply to the context of the post is still an individual is extremely unlikely to have their stop triggered by an organisation.
> 
> "Law360, New York (August 8, 2017, 8:39 PM EDT) -- The Seventh Circuit’s unanimous decision Monday to uphold the conviction of Michael Coscia for a market manipulation tactic known as “spoofing” is a landmark ruling that removes questions about the constitutionality of the law banning such conduct, strengthening government efforts to crack down on the practice, experts said Tuesday."



Well there is an old saying: "you are not a criminal until you get caught!"

Those seeking to profit by foul means are hardly going to allow a few token laws, in a world bereft of adequate financial regulation and market policing, to stunt the growth of their business ventures!

When I see certain firms, of ill, repute getting taken to task, I'll start believing that our society, and it's financial regulators, are making more than a token effort. Until that time "caveat emptor".


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## CanOz (26 September 2017)

Spoofing still happens...not as often or in as many markets as I used to see, generally large lots are getting hit before they're pulled in my markets....


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## Newt (26 September 2017)

bomz_21 said:


> Thank you everyone.
> Some interesting ideas here.
> 
> It's almost as if it's not worth putting a stop loss unless you've already gained some capital growth in a stock & can afford to put a stop loss in place to save a dramatic fall.
> ...




Hi bomz

Guessing from your posts you're more interested in the trading side of things, as described by pixel.  

Some other things to consider, especially if your trading experience matches your post count (sorry if that assumption is incorrect):

- Initial stop should be determined and entered when you ENTER your position
- This protects you from downside loss and yourself - most traders find some (incorrect) reason to talk themselves out of taking losses until they have earned a great deal of experience
- Then once you have profit in longer term positions, consider trailing a stop
- Many strategies are actually worse off for stops - its a trade off in terms of risk reduction (and hopefully drawdown reduction) versus potential harm to profits
- As others have said, too tight a stop can be particularly harmful, too wide and you risk losing too much capital
- In rapidly moving markets, particularly where liquidity is tight, price may gap over your stop - there is no guarantee you will actually get to exit at that price

If I haven't confused the heck out you, perhaps also consider listening in on this podcast:
http://bettersystemtrader.com/037-cesar-alvarez-studies-stop-losses/


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## Modest (27 September 2017)

Modest said:


> I post this post at 11:33PM Perth Time.
> 
> Crude OIL (CL Futures) I anticipate reaching *52.00* as overall target
> 
> ...







Trading at 52.00

Dare I say what the next target is


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## ArenW (30 September 2017)

" Dare I say what the next target is "

Sure , give it a go. Its a 50/50 deal.    Perhaps you can try for the next 10 predictions and we can see if you even break 50% accuracy.


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## drequejo (30 September 2017)

In my opinion Stop loss should be avoid. From my point of view there are three good options for limiting the loses:
- Close the position for any rule your system is telling you
- Limit the loses by buying puts. You can sell a call on top your stop to finance part of the cover put
- Hedge you position buying any VIX ETF/ETN


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## pixel (1 October 2017)

drequejo said:


> In my opinion Stop loss should be avoid. From my point of view there are three good options for limiting the loses:
> - Close the position for any rule your system is telling you
> - Limit the loses by buying puts. You can sell a call on top your stop to finance part of the cover put
> - Hedge you position buying any VIX ETF/ETN



The second and third suggestions work only for a small subset of stocks. Traders operating in the higher-risk speccie space won't be able to sell Puts or buy Vixen.
And your first rule is a cop-out, renaming stop-loss as one of your system rules.


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## drequejo (1 October 2017)

pixel said:


> The second and third suggestions work only for a small subset of stocks. Traders operating in the higher-risk speccie space won't be able to sell Puts or buy Vixen.
> And your first rule is a cop-out, renaming stop-loss as one of your system rules.




Other option is see the correlation of your basket with the index and buy/sell the index future. There are too many options for hedging a portfolio. What it is important is to know why I have the stocks in my portfolio and what is my aversion to the risk. If I am playing a high risk stock then I need to be clear what is the game and how much I am able to lose. If I am investing in a long term portfolio in high dividend stock them the best option is hedge your portfolio and keep getting the dividend. 
Obviously there are no one unique solution, and every solution has its pluses and its minuses that the investor/trader need to evaluate before to incorporate it in his trading plan.


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## pixel (1 October 2017)

drequejo said:


> Obviously there are no one unique solution, and every solution has its pluses and its minuses that the investor/trader need to evaluate before to incorporate it in his trading plan.



I can agree with that. Which is a far cry from your earlier statement that stop-losses be avoided. *Stop-losses are essential *if one doesn't want to lose an accumulated profir, let alone the initially invested capital.


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## drequejo (1 October 2017)

pixel said:


> I can agree with that. Which is a far cry from your earlier statement that stop-losses be avoided. *Stop-losses are essential *if one doesn't want to lose an accumulated profir, let alone the initially invested capital.




Thanks for you comments pixel, I think everybody could understand my initial statement. I never use stop lost as a sell order because you cannot be sure at what price it is going to be executed. Gaps can kill an account. Anyway I only gave a couple of ideas for people to study if that can be incorporated in their trading plans for improving results. Obviously those ideas are not suitable with your trading style. I am curious in knowing which techniques do you use for controlling your losses.


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## rb250660 (1 October 2017)

I never use traditional style stops either. I always have a 'technical' reason or rule to get out.


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## pixel (2 October 2017)

drequejo said:


> I am curious in knowing which techniques do you use for controlling your losses.



I have outlined my s/l rules in an earlier post here.
I use a trailing stop from the very day I entered, regardless of the price at which I bought. It depends on, and is calculated from, a multiple of a daily ATR. That means, it gets recalculated on live charts - but only ever to the upside. And it has to be taken on a Close Below basis. Sure, if the stock happens to gap through the stop or goes into a trading halt before it gets triggered, I lose more. Trading never comes with a guarantee of anything. 

Using live charts has the added advantage that I can select the set of parameters that is best suitable for the specific share and my intended trade.


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## drequejo (2 October 2017)

pixel said:


> I have outlined my s/l rules in an earlier post here.
> I use a trailing stop from the very day I entered, regardless of the price at which I bought. It depends on, and is calculated from, a multiple of a daily ATR. That means, it gets recalculated on live charts - but only ever to the upside. And it has to be taken on a Close Below basis. Sure, if the stock happens to gap through the stop or goes into a trading halt before it gets triggered, I lose more. Trading never comes with a guarantee of anything.
> 
> Using live charts has the added advantage that I can select the set of parameters that is best suitable for the specific share and my intended trade.




Trailing stop is a good technique. I have used it in the past. 
When I changed my trading style I started using different techniques and learning different investment instruments. I use a couple of systems where the stop losses reduce the benefit and increased DD.When I started programming systems I realized that in a lot of cases the Stop Loss was my enemy and I started investigating and looking for different solutions.


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## Boggo (2 October 2017)

Some light reading. A document I downloaded first read in 2008 !!


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