# Letting profits run versus selling at target price



## robusta (3 January 2013)

Funny you brought this up Julia this has been in my thoughts for a while now.



Julia said:


> Might, however, be interesting to have a thread on letting profits run versus price reaching IV.




Having never used stop losses lately I have been considering the possibility of using a trailing stop to sell when one of my more liquid holdings reaches my calculation of fair to over valued. To date this has not been a issue as most sales have been when I have found something better or for portfolio management reasons. 

The trouble with the trailing stop is how will it behave in extreme volatility? It would be nice as advertised if you could take profits at say 5% or 4.5% below the most recent high but how does this work with a risk on, risk off market like we have had recently?


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## CanOz (3 January 2013)

robusta said:


> Funny you brought this up Julia this has been in my thoughts for a while now.
> 
> 
> 
> ...





It's a bit of "roll the dice and take your chances" Robusta...trailing stops generally hurt performance of a system because while they protect profits, they take you out too early. 

Maybe tech/a can recall some rules of thumb regarding trailing stops....lots available on them on the web.

CanOz


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## tech/a (3 January 2013)

Rule of thumb from my results in testing.

Trading methods with win rates above 50% perform better with price targets
Infact it's one of the reasons you have a higher win rate.

Methods with a lower win rate can benefit from trailing stops.

Having said that

Most longer term methods with lower win rates but higher 
R/R perform better with a trend filter which either stops buying in 
Index reversals or completely stopping trading the method.

Some systems will sell All holdings in extreme downturns with it's exit
Criteria. Something that happened with " Tech Trader " in 2008 something I didn't expect!
I had already sold all my holdings but as it turned out I'd have been sold out by the system.

*Robusta*

From what I've seen I don't know that your method has ever been tested either back or forward tested.
What I see is a loose discretionary method which basically wings it.
Mind you not un common most people trade like this.

But without statistics and testing methods questions like yours---which can be very influential on profit
Cannot be answered in a specific case.
It just becomes another discretionary filter with no rules and no guide to how it's introduction is likely to affect your bottom line.


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## Gringotts Bank (3 January 2013)

CanOz said:


> It's a bit of "roll the dice and take your chances" Robusta...trailing stops generally hurt performance of a system because while they protect profits, they take you out too early.
> 
> Maybe tech/a can recall some rules of thumb regarding trailing stops....lots available on them on the web.
> 
> CanOz




I'll second this.  Whether you use a mean reversion or momentum system, percentage and point trailing stops are a thing to avoid, even when adjusted for volatility.  It's not something you'd expect when eyeballing a chart, but they really hurt profits.  However I have found S-R trailing stops to be ok with momentum systems.  With a S-R trail, each new low pivot provides the stop.  If you use this, make sure the n-bar is low so you're getting lots of new pivots printing, otherwise you can end up with a stop that is too far away.  Maybe combine with a time stop.

Plenty of ATR-style trailing stops avail free on the web.


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## DocK (3 January 2013)

I often hear one of the panellists on YMYC advise a caller to take profits off the table when a share has run hard, or reached a price target set by analysts.  I can't really understand why you wouldn't either set a stop instead and let it run further if that's what it's going to do, or simply watch it very carefully and wait until the trend reverses to sell.  Seems pointless to me to sell a rising share just because it's hit an arbitrary price point that may or may not represent full value - we all know that the market can be totally irrational at times so why not profit from it if you can?  Over recent weeks I've heard quite a few "experts" declare that the banks had no further growth left in them and they'd cash out of them before their share prices fall - I'm certainly glad I didn't follow this advice as my CBA shares have continued to appreciate in value.  

It's true that you won't go broke by taking a profit - but you won't get rich by cutting your profits short either.  I've also learnt that having a stop in the market opens you up to the daily volatility hijinks and often takes you out of a trade that recoveres in the same day and continues to power on.  I do believe in stops - but I prefer to follow eod price and enter a sell order manually.  Having said all that - I'm looking for a medium to long-term holding and my approach would make no sense to a short-term trader I expect.


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## Gringotts Bank (3 January 2013)

example of pivot trail stop.  So long as each new low pivot (green) is higher than the last, you're in an uptrend.  Note the big hammer candle that forms the last pivot.  If you had your stop to trigger at a _percentage trailing stop intra-day_, you may well have been manipulated out of a good trade.  So as dock just said, if you use trailing stops, make them applicable to EOD prices.


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## CanOz (3 January 2013)

DocK said:


> It's true that you won't go broke by taking a profit - but you won't get rich by cutting your profits short either.  I've also learnt that having a stop in the market opens you up to the daily volatility hijinks and often takes you out of a trade that recoveres in the same day and continues to power on.  I do believe in stops - but I prefer to follow eod price and enter a sell order manually.  Having said all that - I'm looking for a medium to long-term holding and my approach would make no sense to a short-term trader I expect.




I agree hat you're better off not taking profits and leaving yourself open to a multiple R outlier....some say that if you MUST take profit then just take profit on a partial position...that way you bank some but leave some on for that elusive multi bagger. Not my cup of tea though.

Food for thought...

Good thread Robusta...hope it dosn't turn into a FA/TA bash-up again.

CanOz


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## CanOz (3 January 2013)

Gringotts Bank said:


> So as dock just said, if you use trailing stops, make them applicable to EOD prices.




Agree, if you are a longer term trader and not an intra-day trader then ignoring the intra-day swings is a good idea and using EOD stops on pivots is one way to protect profits....


CanOz


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## tech/a (3 January 2013)

DocK said:


> I often hear one of the panellists on YMYC advise a caller to take profits off the table when a share has run hard, or reached a price target set by analysts.  I can't really understand why you wouldn't either set a stop instead and let it run further if that's what it's going to do, or simply watch it very carefully and wait until the trend reverses to sell.  Seems pointless to me to sell a rising share just because it's hit an arbitrary price point that may or may not represent full value - we all know that the market can be totally irrational at times so why not profit from it if you can?  Over recent weeks I've heard quite a few "experts" declare that the banks had no further growth left in them and they'd cash out of them before their share prices fall - I'm certainly glad I didn't follow this advice as my CBA shares have continued to appreciate in value.




I think youll find its as canOz says for those rises well in excess of the norm.
Ive found that if a stock rises more than 50% in a day and more than 70% in 2 days 
your best advised to place a trailing stop.
These sort of moves are common in the minnows.  



> It's true that you won't go broke by taking a profit - but you won't get rich by cutting your profits short either.  I've also learnt that having a stop in the market opens you up to the daily volatility hijinks and often takes you out of a trade that recoveres in the same day and continues to power on.  I do believe in stops - but I prefer to follow eod price and enter a sell order manually.  Having said all that - I'm looking for a medium to long-term holding and my approach would make no sense to a short-term trader I expect.




Actually the assumption is wrong and many have indeed failed miserably taking profit.
EG
10 trades 7 wins of 5% and 2 losses of 25% each plus one breakeven. Of course there are infinite variations of the same premise.

Best---in my opinion trade short and sweet when things are not predictable and long and hard when they are---short OR Long.

*Timing IS everything*

If one doest have the skill to be around the mark at tops and bottoms (Shares,Property/Gold/Currencies/Oil/Indexes--etal) you need to have something in the market (of choice) at all times. Here Risk mitigation techniques should reside.



> Good thread Robusta...hope it dosn't turn into a FA/TA bash-up again




Frankly CanOz I've not seen a great deal of statistical info produced by the F/A group here (on ASF in discussion).
What is discussed are theories and hypothesis.
Once numbers (the very thing F/A people ponder over for days) are asked for support or in addition to discussion ---it then seems to become a T/A V F/A bash????????????????????

I think *BOTH* technical and Fundamental traders can and often do present cases without some Idiot labelling discussion a competition on which trading method is BEST!

This labelling normally comes from those who cannot follow the discussion or have nothing concrete to add.
They often see failings in their trading and dont have the capability of fixing it--or even attempting to.


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## prawn_86 (3 January 2013)

tech/a said:


> Frankly CanOx I've not seen a great deal of statistical info produced by the F/A group here (on ASF in discussion).
> What is discussed are theories and hypothesis.
> Once numbers (the very thing F/A people ponder over for days) are asked for support or in addition to discussion ---it then seems to become a T/A V F/A bash????????????????????




SKC, McLovin, ROE, SirOsis all offer up numbers at various stages and across various different FA strategies


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## tech/a (3 January 2013)

prawn_86 said:


> SKC, McLovin, ROE, SirOsis all offer up numbers at various stages and across various different FA strategies




As I said very few.
I didn't say NOBODY

Infact I'd argue that very few traders Of any ilk 
Know the " Numbers " of their trading method.

This in my view is the most FUNDAMENTAL undertaking all traders 
Should have at their disposal.

If your a Technical trader you need fundamental numbers either from past
Historical testing and or out of sample and or real time results.

The vast majority of Technical traders think the be all and end all is entry.
Second is exit ----- pondering chart after chart line and indicator color the page

It's only when they don't make CONSISTENT profit they either leave the field as 
Everyone was right---it is voodo 
OR 
They invest the 10000 hrs in learning " How to Trade"

I can certainly say the same for those Fundamental traders and the THIRD type who simply gamble.


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## DocK (3 January 2013)

I've always considered that selling at a set profit point would be something that a fundamental analyst would do when price reached or exceeded their calculated full value of a stock, but also something that a technical analyst may do based on prior resistance levels, or fibonacci extentions for example.  I don't see that practice as belonging in one "camp" or another, but equally used by both.  I can see the reasons for letting price run from a technical  and systems-based perspective, and would be interested to hear what method funamentalists prefer.  I too would dearly love to be able to have a reasoned discussion, rather than the slanging match that often ensues......


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## CanOz (3 January 2013)

Thats an interesting question Dock...maybe So Cynical can comment?  I think there would be a great difference in what a value type investor does and a fundamental 'trader'...

Even Warren Buffet must sell some things once in while..., not just losing trades, but issues that get overvalued?

CanOz


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## skc (3 January 2013)

Re: selling on fundamentals.

I make plenty of mistakes selling too early... usually I calculate a "value" using fairly conservative assumptions (e.g. higher discount rates, lower growth etc). I buy a stock when there's a safety margin below that conservative valuation, and sell when it reaches the target.

While a conservative value for entry will serve you well, this kind of exits will leave much on the table when the company is performing well and hitting revenue / profit targets.

So the investor should adjust the valuation to a somewhat optimistic figure, and sell if the share price exceeds that by a certain % (or adopt a trailing stop of some description).


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## So_Cynical (3 January 2013)

My strategy is a bit of both worlds and it has proven to work quite well as a conservative (risk off) tool.

I sell around 2 thirds of a position when there is 10 > 15% profit to take...leaving the rest as about 40% free carry and 60% capital, selling 2 thirds takes money and risk off the table and allows me to recycle capital, while the small holding i have left exposes me to bigger moves (in both directions) and a dividend/credits stream.

Experience and my open profits from reduced positions clearly shows that big moves come and go, the market moves both ways though overall mostly up, letting some of your profits run has been very beneficial to me and the dividend stream just keep building as long as i keep recycling the cash...at a time like now when the market is having a big leg up my strategy shines.

-----

In my experience i have proven to myself that i have some talent for seeing bottoms and value, and i have next to no talent at seeing tops..over the years almost everything i have sold has gone higher in the 4 months after i have sold...its one of the most consistent outcomes of my strategy, as someone else on this forum says "i made money selling to early"


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## burglar (3 January 2013)

tech/a said:


> ...I can certainly say the same for those Fundamental traders and the THIRD type who simply gamble.




When I arrived here, I thought I was an investor (slightly down on his luck vis a vis the GFC)!
I have since come to the sad realisation that I had been simply gambling.


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## McLovin (3 January 2013)

So_Cynical said:


> In my experience i have proven to myself that i have some talent for seeing bottoms and value, *and i have next to no talent at seeing tops*..*over the years almost everything i have sold has gone higher in the 4 months after i have sold...its one of the most consistent outcomes of my strategy, *as someone else on this forum says "i made money selling to early"




I don't think you're alone in that regard.


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## So_Cynical (3 January 2013)

McLovin said:


> I don't think you're alone in that regard.




Even when i have sold out completely thinking well this cant go higher, and then it promptly does just that.

Stocks can swing wildly in both directions, any system or strategy that lets the profits run can at-least take advantage of the inevitable run ups in price....its just that its so dam hard to do that with a (risk off) stop in place.

Just take the 2 words...*Stop* & *Run* - they are opposites of a kind, Stop is no movement and the end of something and Run is rapid movement and something in motion...they don't sit well together.


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## explod (3 January 2013)

So_Cynical said:


> In my experience i have proven to myself that i have some talent for seeing bottoms and value, and i have next to no talent at seeing tops..over the years almost everything i have sold has gone higher in the 4 months after i have sold...its one of the most consistent outcomes of my strategy, as someone else on this forum says "i made money selling to early"





Some years ago I purchased a book "Trend Following" by Michael Covel and have found it very good.  A later one "Little Book of Trading, Trend following strategies for big winners" I have, but not looked it over yet, said to be very good as well.  Basically, get on on a 10% rise and off at a 5% fall, one in six trades work and those that do cover the loss of the other five.

Yes the big issue is, do I let it run or not.  The 5% stop idea does cut one off prematurely but safe..

On a trend I tend to rule up the top and bottom of a trading range from the start of the trend and set my stop at the bottom.   However it is the trading activity, volume most telling for me.   High volume on a stalling top is a sell, high (more correctly increasing) volume near the stop is a hold. 

The opposite is true of low volume, low at top hold, low volume and falling get out fast as liquidity comes into the equation on this scenario here.


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## tech/a (3 January 2013)

Good stuff ex.

You have one of my entry and exit criteria for long and
Short trades.
Another is the complete opposite to your low volume
Observation.
I look for an *EXTREMELY* low volume bar *FOLLOWING* 
the bar with very high volume ---- in the same direction as the
Very high volume bar ( max 10 bars following the very high volume
Bar 3 to 6 bars ideal )
My stop is a the high or low of the extremely low volume bar.

PAV has been using it for sometime with success I believe.
Finds quite a lot of starts ----- finishes and continuations.

Many also forget t place their stop at Break even as it moves well 
In their direction --- this can have a great affect on the bottom line.

*Click to expand*




The 6 th bar (second gap) could also be argued as the buy trigger bar.


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## Julia (3 January 2013)

I'm happy to keep it very simple:  just stay on a rising trend with no nominated exit target price.
I don't mind giving back a bit of profit by missing the absolute start of a downtrend.
Ditto re applying the same principle to  the overall market and other asset classes.
If property looked like really taking off again as it did in the 80's where you could double your capital in not much over a year, I'd whack everything into that.

I did get caught out with one stock some years ago, can't now even remember what it was, when a rather nasty profit warning at the open sent the stock plunging almost 50%.


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## tech/a (3 January 2013)

Julia said:


> I'm happy to keep it very simple:  just stay on a rising trend with no nominated exit target price.
> I don't mind giving back a bit of profit by missing the absolute start of a downtrend.
> Ditto re applying the same principle to  the overall market and other asset classes.
> If property looked like really taking off again as it did in the 80's where you could double your capital in not much over a year, I'd whack everything into that.




Missed it Julia that was 1996-2006


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## robusta (3 January 2013)

Julia said:


> I did get caught out with one stock some years ago, can't now even remember what it was, when a rather nasty profit warning at the open sent the stock plunging almost 50%.




That is the danger I have been considering, looking at a lot of low liquidity stocks in my portfolio. Take for example OKN that I have just sold. If the price fell 30-50% I would be more inclined to hold or add to my holding. All else being equal. The stop loss would cause me to sell at precisely the wrong time for my investment strategy.


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## peter2 (3 January 2013)

Robusta: You intend to become a long term investor not a technical trader, I agree with Julia, keep it simple. Your exits should be limited to a change in company fundamentals or unsuitable economic conditions. SKC compiled a good thread on trading with fundamentals (IMO It should be archived as a classic thread.) 

Value investors buy when conditions seem bad and sell years later when prices are ridiculously above IV. I would suggest that you consider using some form of trailing stop only when you have identified that the SP is historically highly overpriced. Trend traders know that trends can last much longer then we think, so investors need to be able to stick with them as well. 

Investors ride the big waves of economic cycles, not the ripples of sentimental momentum. Your exit strategy should be geared to deliver what you need based on your investment goals. You have to think long term. The last two years have been great years for a value investor to accumulate shares in solid companies at very low prices. You can't expect to make money during these accumulation years but you can expect to makes heaps during the growth phase. Your payoff is in 3-5 years time. Why sell now when economic conditions are improving? 

IMO you should be fully invested for the next five years and working hard to add capital. Yes, you will see one of your stocks crash and burn. You won't be able to avoid it, but you can make sure that the damage is small. 
Don't become distracted by short term sentiment. Know where we are in the larger economic cycle.


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## Ves (3 January 2013)

peter2 said:


> Robusta: You intend to become a long term investor not a technical trader, I agree with Julia, keep it simple. Your exits should be limited to a change in company fundamentals or unsuitable economic conditions. SKC compiled a good thread on trading with fundamentals (IMO It should be archived as a classic thread.)
> 
> Value investors buy when conditions seem bad and sell years later when prices are ridiculously above IV. I would suggest that you consider using some form of trailing stop only when you have identified that the SP is historically highly overpriced. Trend traders know that trends can last much longer then we think, so investors need to be able to stick with them as well.
> 
> ...



Great post +1.


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## robusta (3 January 2013)

peter2 said:


> Robusta: You intend to become a long term investor not a technical trader, I agree with Julia, keep it simple. Your exits should be limited to a change in company fundamentals or unsuitable economic conditions. SKC compiled a good thread on trading with fundamentals (IMO It should be archived as a classic thread.)




Agree regarding the SKC thread it is a classic.

I would add two selling criteria however, rectifying a poor initial buy decision and portfolio management.



peter2 said:


> Value investors buy when conditions seem bad and sell years later when prices are ridiculously above IV. I would suggest that you consider using some form of trailing stop only when you have identified that the SP is historically highly overpriced. Trend traders know that trends can last much longer then we think, so investors need to be able to stick with them as well.




Very good point, I am considering using trailing stops with my larger caps but the price would have to appreciate markedly from where they are today.



peter2 said:


> Investors ride the big waves of economic cycles, not the ripples of sentimental momentum. Your exit strategy should be geared to deliver what you need based on your investment goals. You have to think long term. The last two years have been great years for a value investor to accumulate shares in solid companies at very low prices. You can't expect to make money during these accumulation years but you can expect to makes heaps during the growth phase. Your payoff is in 3-5 years time. Why sell now when economic conditions are improving?




Not sure how qualified I am to judge economic conditions, the core of my portfolio however is held for the long term.



peter2 said:


> IMO you should be fully invested for the next five years and working hard to add capital. Yes, you will see one of your stocks crash and burn. You won't be able to avoid it, but you can make sure that the damage is small.
> Don't become distracted by short term sentiment. Know where we are in the larger economic cycle.




It is difficult not to be distracted by the recent risk on/risk off markets. My goal is to fill the portfolio with quality businesses with a competitive advantage, I believe I hold a few of these. In the short to medium term I will cull those that are not the highest quality when the market is risk on and buy any bright prospects when the market is risk off.

Thank you for a excellent post peter2


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## systematic (3 January 2013)

A couple random comments:

Great post Peter2.  I agree: investors (or longer term traders) ride the big(ger) waves.  So the main point here in my opinion...whatever you do, make sure that your stop policy (including not having one) _helps you fulfill your goal_.

It might be blindingly obvious, but an extremely simple example:  Joe Blow (not the ASF one, the other one, lol)...has an SMSF, starts doing his own stock picking, wants to tend to his investments perhaps on the weekends, and would like most trades to last a year or more if possible.  Let's say he subscribes to a good fundamental based newsletter or something, and decides to use those as his universe to explore further.  Reads a book that talks about tight stop losses in some shorter term trading system, or reads about using trailing stops somewhere and decides to run a 5% or 10% trailing stop on his trades.

Hmmm.  Joe Blow now has a major problem.  No congruency with what he was trying to acheive.  His new trading rule has him in and out of the market, looking for replacement stocks and checking the latest prices far more than he intended to.  Not a good recipe for sticking to a system (not to say anything about lack of testing).


Anyway, enough of that.

So_Cynical's post reminded me of Van Tharpe's Safe Strategies book that mentioned taking 2/3rds of a trade off when up 50%, leaving the rest on for a "risk free" trade (similar to setting stop to breakeven really - but your money is out of the market).

Also reminds me of Ben Graham (when he had his quant / systematic hat on).  I've not really had an interest in profit taking (like many, I prefer to be kicked out of a trade).  But you learn something new every day.  Saw a Ben Graham system tested that included a time stop (nothing new there) and a profit taking stop.  i.e. if a stock gets to your profit level before the time cutoff, you're out (and obviously, if not you're out at the time cut off).
Worked just fine (US stocks).

I still don't think it makes sense in a real world way - why get out of a stock that's been going so great for you?) - but if it can work, it can work, and if it's a rule that keeps Joe Blow better able to stick to his system, then it may well be worth it.


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## Julia (3 January 2013)

tech/a said:


> Missed it Julia that was 1996-2006



I was talking about my own experience in New Zealand in the late 80's.
I have absolutely no experience of house prices in Queensland doubling in a bit over a year at any time during the period you refer to above.


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## howardbandy (4 January 2013)

Greetings --

Whether a particular type of exit is appropriate for a trading system depends a lot on the design of the system.  For simplicity, I'll divide systems into:
TF.  Those that hold a long time (more than a week or so) and are looking for a large gain by trading with a trend.
MR.  Those that hold a short time (a day to a week) and are looking for a smaller gain by trading a mean reversion.

There are five general method for exiting a trade:
1.  Logic -- the rules.
2.  Profit target.
3.  Maximum holding period.
4.  Trailing exit.
5.  Maximum loss exit.

TF systems -- trend following systems.  
1.  Logic.  It is always appropriate to have an exit caused by a rule.  The exit rule does not have to be the same type as the entry rule, and even if it is the same type, it does not have to be symmetric in its parameters.
2.  Profit target.  Every exit should occur often enough so that it can be tested and measured.  Whenever a profit target is hit, that truncates the profit of the trade.  Setting a profit target limits the ability of a trend following system to hold winners.  Profit targets are not appropriate for trend following systems.
3.  Maximum holding period.  Similar to profit targets, holding period exits are not appropriate for trend following systems.
4.  Trailing exits.  Two commonly used trailing exits are Chandelier and Parabolic.  Both are appropriate for trend following systems.  When using the Chandelier exit, some open profit is always given back because the exit level remains fixed when the issue price stops moving upward.  The exit occurs when the price falls down to the level of the exit.  When using the Parabolic exit, the exit level continues to rise, even when the price remains the same for a number of bars.  The exit occurs when the price and the exit level meet.
5.  Maximum loss exits.  This is the exit set when using the advice to "know your exit when you enter your trade."  Maximum loss exits can be useful for trend following systems.  If a trailing exit is also being used, the exit will take place at the level that is closest, so the initial level of the trailing exit can be used as a maximum loss exit.

MR systems -- Mean reversion systems.
1.  Logic.  It is always appropriate to have an exit based on rules.
2.  Profit target.  Mean reversion systems are looking for a high percentage of winning trades.  The maximum profit available is limited by the amount the price had deviated from the mean when the trade was entered.  Using SPY as an example, there are about 24 opportunities a year to take long trades that are one to five days in length.  The typical maximum profit of those is about 1 percent.  Setting a profit target is appropriate when the profit target is on the order of the typical maximum profit.  Profit targets of 0.5 to 1.0 percent are appropriate for SPY for mean reversion systems.
3.  Holding period.  Mean reversion trades are usually complete with five days, so setting a maximum holding period of about the length of time it takes for the price to revert to the mean is appropriate.
4.  Trailing exit.  If the data used to develop and trade the system is daily bars, in most cases there are not enough bars for the trade to become established and the trailing exit level to catch up to the price.  If you want to use a trailing exit with a mean reversion system:
A.  Use Parabolic rather than Chandelier.
B.  Use multiple time frames, with the trailing exit based on intra-day bars.
5.  Maximum loss exit.  Without exception -- maximum loss exits hurt the performance of mean reversion systems.  

As always, code your system into the language of a trading system development platform and test it.  Every exit should occur often enough that the tests are meaningful.

My newest book, "Mean Reversion Trading Systems," is in printing production this week.  It has more detailed explanations of mean reversion system and exit techniques, including ready-to-run AmiBroker code.  You can learn more about the book and read the first three chapters at the book's website:
www.MeanReversionTradingSystems.com

Thanks for listening,
Howard


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## DocK (4 January 2013)

Julia said:


> I'm happy to keep it very simple:  just stay on a rising trend with no nominated exit target price.
> I don't mind giving back a bit of profit by missing the absolute start of a downtrend.
> Ditto re applying the same principle to  the overall market and other asset classes.
> If property looked like really taking off again as it did in the 80's where you could double your capital in not much over a year, I'd whack everything into that.
> ...




How do you select your individual share purchases and their exits Julia?  I know you're not in the market atm, but if you were to begin reinvesting in shares, what are your criteria - do you use a system, or are your purchases made on a discretionary basis?  Likewise with exits, do you have a strict rule that you follow (% price decline/prior support broken etc) or is it more arbitrary?

I got caught not long ago with Hills Holdings - closed one day at $1.15 and the next at 0.75c after a rather nasty market update.


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## DocK (4 January 2013)

howardbandy said:


> Greetings --
> 
> Whether a particular type of exit is appropriate for a trading system depends a lot on the design of the system.  For simplicity, I'll divide systems into:
> TF.  Those that hold a long time (more than a week or so) and are looking for a large gain by trading with a trend.
> ...




Thank you Howard for an interesting and informative post.


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## tech/a (4 January 2013)

peter2 said:


> Robusta: You intend to become a long term investor not a technical trader,




Peter why cant an investor invest technically? There are some great interviews I've read with technical investors who use a 1 mth time frame.



> I agree with Julia, keep it simple. *Your exits should be limited to a change in company fundamentals or unsuitable economic conditions*. SKC compiled a good thread on trading with fundamentals (IMO It should be archived as a classic thread.)




Agree but also agree with Robusta's added exit conditions. But simple should be evolved not purely initiated.



> Value investors buy when conditions seem bad and sell years later when prices are ridiculously above IV



.

Correct me if wrong but I thought value investing was identifying a stock trading below its intrinsic value. Very little if anything to do with "conditions"?



> I would suggest that you consider using some form of trailing stop only when you have identified that the SP is historically highly overpriced. Trend traders know that trends can last much longer then we think, so investors need to be able to stick with them as well.




Testing would possibly validate this idea. 



> Investors ride the big waves of economic cycles, not the ripples of sentimental momentum. Your exit strategy should be geared to deliver what *you need based on your investment goals.* You have to think long term.




Could you elaborate on this a little more? I'm presuming as a passive income or annuity perhaps and of course tax considerations. But again this would be hard to adhere to if Market conditions went Pear shaped.



> The last two years have been great years for a value investor to accumulate shares in solid companies at very low prices. You can't expect to make money during these accumulation years but you can expect to makes heaps during the growth phase. Your payoff is in 3-5 years time. Why sell now when economic conditions are improving?




There are a few who see the current ranging (Last 2 years) as Distribution. Neither accumulation OR Distribution have been confirmed. 
I would certainly argue that I cannot see the improvement you mention in macro economic conditions-even micro.
I really dont know that buying your brains out now is a wise idea. the next dip may not be a dip but a bear trend of catastrophic proportions---if you have a contingency for this then fine. A few of us are sitting on the side lines---portfolio wise.



> IMO you should be fully invested for the next five years and working hard to add capital. Yes, you will see one of your stocks crash and burn. You won't be able to avoid it, but you can make sure that the damage is small.
> Don't become distracted by short term sentiment. Know where we are in the larger economic cycle.




You speak of cycles yet Im seeing some serious economic anomalies not seen before in the western financial system.
I'm also seeing governments struggling/not to handle/handling them. Short term sentiment? Can you expand?



systematic said:


> A couple random comments:
> 
> Great post Peter2.  I agree: investors (or longer term traders) ride the big(ger) waves.  So the main point here in my opinion...whatever you do,* make sure that your stop policy* (including not having one) _helps you fulfill your goal_.




Sage advice.



> It might be blindingly obvious, but an extremely simple example:  Joe Blow (not the ASF one, the other one, lol)...has an SMSF, starts doing his own stock picking, wants to tend to his investments perhaps on the weekends, and would like most trades to last a year or more if possible.  Let's say he subscribes to a good fundamental based newsletter or something, and decides to use those as his universe to explore further.  Reads a book that talks about tight stop losses in some shorter term trading system, or reads about using trailing stops somewhere and decides to run a 5% or 10% trailing stop on his trades.
> 
> Hmmm.  Joe Blow now has a major problem.  No congruency with what he was trying to acheive.  His new trading rule has him in and out of the market, looking for replacement stocks and checking the latest prices far more than he intended to.  Not a good recipe for sticking to a system (not to say anything about lack of testing).




And this is Robusta's specific issue I believe --- some great conditions in his plan but* NO IDEA* if when traded together they are long term profitable. He's basically forward testing his ideas. The market is ranging and he continues to find a *KEY* to profit.
All *WILL* come in a bull market---I my opinion capital preservation and development and testing of his plan/s should be paramount. This *WILL* take some years and a great deal of education---but it will be worth it.




> Anyway, enough of that.
> 
> So_Cynical's post reminded me of Van Tharpe's Safe Strategies book that mentioned taking 2/3rds of a trade off when up 50%, leaving the rest on for a "risk free" trade (similar to setting stop to breakeven really - but your money is out of the market).




I always find this definition of a Risk Free trade amusing.Like playing with *YOUR PROFITS* on anything.
Its *NOT* Risk free its* YOUR MONEY*. You can take it out of the market and buy food --whatever with it.



> Also reminds me of Ben Graham (when he had his quant / systematic hat on).  I've not really had an interest in profit taking (like many, I prefer to be kicked out of a trade).  But you learn something new every day.  Saw a Ben Graham system tested that included a time stop (nothing new there) and a profit taking stop.  i.e. if a stock gets to your profit level before the time cutoff, you're out (and obviously, if not you're out at the time cut off).
> Worked just fine (US stocks).




Evidence then great.If Ben Graham can test for results so to can Robusta and anyone!



> I still don't think it makes sense in a real world way - why get out of a stock that's been going so great for you?) - but if it can work, it can work, and if it's a rule that keeps Joe Blow better able to stick to his system, then it may well be worth it.




Again he will know when he has results to prove that he knows.
His trading will reflect his results and he will be far better able to follow his method without addition or subtraction as he will have a blueprint of numbers he can compare with.
He'll know if that string of losses is out of character---if his R/R is within range of his high and low Deviations set by his Montecarlo testing.

If you cant do it Robusta pay someone who can---will be a very sound investment in my opinion---*you have some great building blocks*---what you need to know is how to put them together.---in the best building design.



> *As always, code your system into the language of a trading system development platform and test it. Every exit should occur often enough that the tests are meaningful*.




And lastly from Howard another advocate of developing a proven method.

This I'm afraid is where the 95% of failed traders/investors normally falter.


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## Knobby22 (4 January 2013)

I have a fundamental portfolio and a technical portfolio.
Both have gone up about the same amount. I don't have time to spend charting so I use Nick Radge's site. (thanks Tech).

I find that it is good to look at the charts of the fundamental picks and Nicks graph explanations help.

So you can see that my fundamental investing is influenced by the charting.

My charting on the other hand is slightly influenced by fundamental investing. Sometimes I won't buy a share or set my stops tighter based on the fact that I'm not happy with the fundamentals of the company. Or alternatively, if it is share that I am very interested in for fundamental reasons I may go overweight.

I have to say, I don't set a target price, I just raise the stop. If it hits the stop I sell. Pretty basic really. I like to hold over a reasonable time frame. I am not into daytrades where I suppose the target price is very important.


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## peter2 (4 January 2013)

@tech/a: Thank you for your thoughtful post. 

ATM robusta has not shown any interest in the charts and all we can do is present our preferences. I believe that a little bit of both is optimal. Personally I'm 70% chart based, 20% market sentiment (market filter), 10% FA. For example I won't buy a break-out in a gold explorer unless the POG is going up. 

It seems that we all start with simple, make things more complicated and then return to simple once we understand what's really important. 

I prefer to stay on topic, but don't want to appear rude and not reply to your queries. I agree that all of our trading/investing decisions should be validated before implementation. However there are many who cannot do the research that we think is required. I did not start with any backtesting experience but I learned from the work of others and used their work to validate many of my trading rules. I think robusta should record the reasons for his exits so that in a few years time he can review the effectiveness of his decisions. We may not be able to back test a discretionary approach however we can record and review its effectiveness. Another example, I sometimes sell before my exit stops are triggered. Reviewing these decisions over the past five years shows me that these discretionary exits add to my edge. Knowing this I have implemented a tighter trailing stop strategy. This has reduced the number of "gutfeel" exits substantially and made me more consistent. 

You will point out that I could have tested this before starting, but without money on the line the difference between 1.5 atr and 3 atr is just a number. When you see the amount of money this number represents in real time it's very different. 

I want robusta's thread and others like it to be a positive learning experience. I want to offer advice, suggestions, provoke thought to help him build his investing business. I want threads like his to last years* just like the techtrader thread. 

*  What do the mods what?


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## Julia (4 January 2013)

> I agree with Julia, keep it simple. Your exits should be limited to a change in company fundamentals or unsuitable economic conditions.



I just want to clarify the above from Peter:  I did say that I prefer to keep things simple, but I've made no comment about what exits should be limited to.  Would really appreciate not being misquoted, though in this instance probably what has happened is that Peter has just run his own comment on after mine.




DocK said:


> How do you select your individual share purchases and their exits Julia?  I know you're not in the market atm, but if you were to begin reinvesting in shares, what are your criteria - do you use a system, or are your purchases made on a discretionary basis?  Likewise with exits, do you have a strict rule that you follow (% price decline/prior support broken etc) or is it more arbitrary?



Discretionary.  Some of the basic criteria are:

Low or no debt

Market Cap > $1m

Increasing EPS
Increasing DPS

Good liquidity

Yield > 5% ff

Established company with record of sound management.

Entry - uptrend.

Exit criteria will vary company by company.  Stop will be much wider on e.g. one of the big banks than on smaller companies.

Above all, focus on capital preservation because I'm dependent on my capital to generate a living.
Remain aware always of potential disaster.

Never, ever even remotely think about buying the next speccie wonder that can go broke as easily as it can succeed.


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## Julia (4 January 2013)

tech/a said:


> I really dont know that buying your brains out now is a wise idea. the next dip may not be a dip but a bear trend of catastrophic proportions---if you have a contingency for this then fine. A few of us are sitting on the side lines---portfolio wise.



+1.  But people will perhaps see this differently depending on their age and circumstances.  Someone aged 25, who is a dedicated 'value investor' will take a different view from someone generating a living from their capital and without all those recovery years ahead.

I'd just like to thank everyone contributing to this thread for the polite and constructive discussion.  Just demonstrates that alternate approaches can be tossed about, justified, criticised, all in a civil manner.
It makes a big difference imo.  No one storms away in a hissy fit and we all potentially learn something.


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## tech/a (4 January 2013)

> I'd just like to thank everyone contributing to this thread for the polite and constructive discussion. Just demonstrates that alternate approaches can be tossed about, justified, criticised, all in a civil manner.
> It makes a big difference imo. No one storms away in a hissy fit and we all potentially learn something.




Mutual respect for participants I suspect.
And no personal snipes.


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## robusta (4 January 2013)

tech/a said:


> Mutual respect for participants I suspect.
> And no personal snipes.




+1


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## DocK (4 January 2013)

Julia said:


> +1.  But people will perhaps see this differently depending on their age and circumstances.  Someone aged 25, who is a dedicated 'value investor' will take a different view from someone generating a living from their capital and without all those recovery years ahead.



I wish I was 25 again, but unfortunately I sit somewhere in the middle - not young enough to take (another) big hit, but at least a decade or two off retirement.  I'm reasonably heavily invested atm, which does make me a little uneasy given the state of the world, but by being so I've benefitted from the last 6 months of general uptrend.  Capital growth is my focus, rather than income, and one of Radge's favourite sayings is pertinent to me - something along the lines of "you have to be in it to win it".  Getting in after most of the recovery has been made is useless to me - I need to be there at the start.  The charts also show that every protracted down-trend has had shorter periods of up-trends within them - I'm not convinced that this present uptrend will last very long, but I want to extract as much profit from it as I can before getting out and waiting for the next.  Having said that I'm hoping if it all goes to hell that it will be a slow general decline that will allow me to get out, rather than an overnight 50% plunge.  




> I'd just like to thank everyone contributing to this thread for the polite and constructive discussion.  Just demonstrates that alternate approaches can be tossed about, justified, criticised, all in a civil manner.
> It makes a big difference imo.  No one storms away in a hissy fit and we all potentially learn something.



+1  
I genuinely love reading of other people's approaches - even those not attractive to my style.  I'm firmly of the opinion that there are generally several ways to arrive at the same destination and there is no one-size-fits-all failsafe method.  Most of my investments have been made via The Chartist's GP, but like Knobby I do reject a recommended buy here and there due to fundamental reasons.  My discretionary purchases have been made on very similar criteria to Julia's actually, although I look for increasing ROE & ROC rather than an increasing DPS, focus on ASX300 rather than market cap > 1M (although most would probably fit that criteria), and only look for FF yield >4-5% for my SMSF purchases, not concerned with yield on my personal portfolio as I'm focussed more on growth.  Low debt, good liquidity, increasing profits and sound management/past performance are common to us both, but I like to try to buy on a resumption of uptrend after a dip in my inexact attempt to get a good company at a reasonable price.  Sometimes I just let a buy order well below current price sit in the market in case I get filled on daily volatility - have been lucky once or twice.  That's as close to Value Investing as I get.  

Although I can certainly appreciate why some favour the value investing method, I don't place a lot of faith in the ability to crunch the numbers and arrive at a precise IV, or calculate forward earnings.  To my mind most of the available information is not necessarily current, may not represent a totally accurate picture of the company concerned, and it is impossible to predict what factors may affect forward earnings. The smart money in the big funds is going to be already buying or selling based on the same info that they've probably obtained much earlier than it would be available to me - and their prognosis will be evident on the chart.  The very fact that so many analysts disagree on IV and price targets indicates to me that it's a discretionary method that requires a fair amount of self-belief on the part of the value investor. I like to see buyers queueing up and then join the party. In a lot of ways I see charting as the lazy way of following what the number-crunchers have put in the hard work to figure out - is a company a good risk or not?


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## tech/a (4 January 2013)

> Although I can certainly appreciate why some favour the value investing method, I don't place a lot of faith in the ability to crunch the numbers and arrive at a precise IV, or calculate forward earnings. To my mind most of the available information is not necessarily current, may not represent a totally accurate picture of the company concerned, and it is impossible to predict what factors may affect forward earnings. The smart money in the big funds is going to be already buying or selling based on the same info that they've probably obtained much earlier than it would be available to me - and their prognosis will be evident on the chart. *The very fact that so many analysts disagree on IV and price targets indicates to me that it's a discretionary method that requires a fair amount of self-belief on the part of the value investor*. I like to see buyers queuing up and then join the party. In a lot of ways I see charting as the lazy way of following what the number-crunchers have put in the hard work to figure out - is a company a good risk or not?




Precisely why I have not followed the Fundamental Trading methodology.
If the pros get it wrong more often than not what hope have I got?

Like your style Doc.


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## cynic (4 January 2013)

tech/a said:


> Precisely why I have not followed the Fundamental Trading methodology.
> If the pros get it wrong more often than not what hope have I got?




That's the great thing about negative expectancy. All one has to do is put oneself on the opposing side of their trades and "voila".


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## McLovin (4 January 2013)

DocK said:


> The very fact that so many analysts disagree on IV and price targets indicates to me that it's a discretionary method that requires a fair amount of self-belief on the part of the value investor.




Analysts or pundits? Analysts get things right most of the time, but they every now and then make glaringly obvious mistakes. Also they don't spend much time in the small end of the market. I don't know too many people who take sell side analysts' price targets very seriously. I read their reports because they usually have some useful info, but I have never bought or sold something because an analyst report said it was cheap/expensive.

Pundits on the other hand, well they get asked for an opinion so they give one. They write off entire sectors because they're not in fashion.


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## Ves (4 January 2013)

tech/a said:


> If the pros get it wrong more often than not what hope have I got?



I think differently - If the pros always got it right then how on earth would anyone else make any money?

Their mistakes are opportunity for others.


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## DocK (4 January 2013)

McLovin said:


> Analysts or pundits? Analysts get things right most of the time. I don't know too many people who take sell side analysts' price targets very seriously. I read their reports because they usually have some useful info, but I have never bought or sold something because an analyst report said it was cheap/expensive.
> 
> Pundits on the other hand, well they get asked for an opinion so they give one. They write off entire sectors because they're not in fashion.




No, I was talking about broker's analysis.  Quite often they'll all fall within a tight range, or agree, but on some occasions they can vary quite a bit - I guess often due to their predictions for the industry concerned.  If you think the iron ore price is going to fall and stay low or rise to all-time highs, then that will colour your value for stocks in that industry won't it?  I know the liklihood of me predicting such things with any consistency is low, so I prefer to just follow the crowd.  

I've actually just been watching last night's YMYC, and the three panellists are the most gloomy, conservative bunch they've had on for a while.  They've just written off as "dogs" two shares I own, which are still in uptrends, and advised a caller to sell another as it's way over their calculated full value so therefore the smart thing to do is to sell and take profits.  I'm going to do the opposite and continue to hold my "dogs" while they continue to rise in price, and have no intention of selling IIN until it takes out its prior pivot low.  I guess history will tell whether they were right or I am - but I prefer not to sell based on calculations or predictions - I want to stay on the ride until it's over.


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## McLovin (4 January 2013)

DocK said:


> No, I was talking about broker's analysis.  Quite often they'll all fall within a tight range, or agree, but on some occasions they can vary quite a bit - I guess often due to their predictions for the industry concerned.  If you think the iron ore price is going to fall and stay low or rise to all-time highs, then that will colour your value for stocks in that industry won't it?  I know the liklihood of me predicting such things with any consistency is low, so I prefer to just follow the crowd.




That's a fair point, but then again, I don't think anyone knows where the price of iron-ore is going in the near term. I think it's going down and have been saying so for a while, but I have no idea when that will happen. Obviously, it's of no use to tell someone asking for advice "I don't know the answer" because they'll go to someone who will give them an answer, so instead they have to develop a hypothesis for what should be unknowns. I just avoid mining stocks.



DocK said:


> I've actually just been watching last night's YMYC, and the three panellists are the most gloomy, conservative bunch they've had on for a while.  They've just written off as "dogs" two shares I own, which are still in uptrends, and advised a caller to sell another as it's way over their calculated full value so therefore the smart thing to do is to sell and take profits.  I'm going to do the opposite and continue to hold my "dogs" while they continue to rise in price, and have no intention of selling IIN until it takes out its prior pivot low.  I guess history will tell whether they were right or I am - but I prefer not to sell based on calculations or predictions - I want to stay on the ride until it's over.




Yeah, YMYC, seems to be pundits. While they have a small circle of stocks they may know about, they do often seem as though they are answering questions about a company they know nothing about. It doesn't mean they are bad investors, they just have to provide an answer because it's television. I couldn't provide you with an intelligent answer about 98% of the companies listed on the ASX, I still do alright because where I put my money I have done my research.


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## robusta (4 January 2013)

Ves said:


> I think differently - If the pros always got it right then how on earth would anyone else make any money?
> 
> Their mistakes are opportunity for others.




The pros also in the main have a vested interest in turnover, how many times have we seen a stock go from a buy to a hold to a sell then back to a buy.  Repeat the process enough and the house makes all the money.

Add to that short term thinking from the pros, I am sure I read a sell recommendation on CSL 18 months ago because of the high Australian $ and global uncertainty. There's plenty of opportunities for the patient investor.


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## herzy (5 January 2013)

Julia said:


> Discretionary.  Some of the basic criteria are:
> 
> Low or no debt
> 
> ...




Sounds pretty good - out of interest, if you are stopped out of a company with good liquidity, increasing EPS and DPS, yield has obviously become bigger, and management remains the same - will you buy back in at a lower price? If so, under what circumstances? Say you had a 5% trailing stop loss, would you buy back in if it has dropped 20%? Or only buy back in on another uptrend, irrespective of price (subject of course to yield)?


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## RottenValue (5 January 2013)

Another very interesting thread on a topic that probably takes up more mind share for me than when to buy.

As a 95% FA (admit to glancing at charts following committing to buy decision), I have found that best approach to selling is to follow same rules that I used to buy.

Buying for me is based around having a strong degree of confidence that purchasing stock XXX at Price $n.nn is highly likely to return 15% pa TSR over the next 5 years.  This is based on my view of ROE, EPS growth and DPS growth based on analysis with a conservative MOS.  I accept the view that this is "*a discretionary method that requires a fair amount of self-belief on the part of the value investor*" but it seems to work well for me .

This approach means that I have limited buying opportunities, the price I am prepared to buy at generally only comes into play when external events such as Greek Defaults or Product Recalls affect market sentiment.  

The "problem" that I have had over the past 6 months is that having waited patiently to buy something, you take the opportunity, and then find the market settles and you get a big jump in price (20-40%) in a very short period.  Though this is obviously good, having spent a long time researching the stock I find it difficult to let it go as a degree of attachment has occurred:bad:

To address this, my portfolio tracking sheet starts flashing red at me when a stocks SP has risen to a level higher than my system predicted it would reach in 3 years time (based on my original 15% pa requirements).  This indicates that the stock has moved from cheap to over-priced and it is time to take profits.

I still find it difficult to sell as my basic philosophy is to buy for long-term holds but applying the same discipline to selling as buying has meant that selling over-priced stocks (in my opinion of course) at least occurs now.  Still hurts when the price continues to increase after having sold


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## Julia (5 January 2013)

DocK said:


> Low debt, good liquidity, increasing profits and sound management/past performance are common to us both, but I like to try to buy on a resumption of uptrend after a dip in my inexact attempt to get a good company at a reasonable price.  Sometimes I just let a buy order well below current price sit in the market in case I get filled on daily volatility - have been lucky once or twice.



I'd have thought this was a given, but it does raise the question of how value investors buy into a company.
Could one of you perhaps comment on this?  eg if you decide a company is trading below your IV, will you look at a chart to determine an appropriate entry and place a limit order accordingly?  Or is your lack of interest in the market price sufficient to render the actual entry point irrelevant?



herzy said:


> Sounds pretty good - out of interest, if you are stopped out of a company with good liquidity, increasing EPS and DPS, yield has obviously become bigger, and management remains the same - will you buy back in at a lower price? If so, under what circumstances? Say you had a 5% trailing stop loss, would you buy back in if it has dropped 20%? Or only buy back in on another uptrend, irrespective of price (subject of course to yield)?



herzy, I don't have any hard and fast rule about this.  I can think of two instances when I'd have been better holding through the downturn than selling, viz CBA and MND.   
At the time of the GFC, bearing in mind that my absolute focus is capital preservation, I just sold everything when I became convinced a big fall was starting.  

Having been out of the market for a few years now, I'm sufficiently disenchanted with the 4.75% interest on the small amount I have at call (not quite $100K) that I'm looking at putting most of it back into the market.  The rest is tied up in term deposits taken out when rates were much higher.

What I buy will definitely have to be in an uptrend.  Am dithering about CBA.  It's a proven winner over many years, but has run hard.  That's no reason why it can't continue upward, though, given the numbers of people like myself who don't find under 5% a reasonable return .  At the same time,there's much potential imo for a GFC MK2.
I don't know if this actually answers your question.  Sorry to be unhelpful.


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## DocK (5 January 2013)

RottenValue said:


> Another very interesting thread on a topic that probably takes up more mind share for me than when to buy.
> 
> As a 95% FA (admit to glancing at charts following committing to buy decision), I have found that best approach to selling is to follow same rules that I used to buy.
> 
> Buying for me is based around having a strong degree of confidence that purchasing stock XXX at Price $n.nn is highly likely to return 15% pa TSR over the next 5 years.  This is based on my view of ROE, EPS growth and DPS growth based on analysis with a conservative MOS.  I accept the view that this is "*a discretionary method that requires a fair amount of self-belief on the part of the value investor*" but it seems to work well for me .



It's the self-belief aspect that would be a major hurdle for me - I think I'd start second-guessing my calculations and decision-making ability if price started to fall.  



RottenValue said:


> This approach means that I have limited buying opportunities, the price I am prepared to buy at generally only comes into play when external events such as Greek Defaults or Product Recalls affect market sentiment.
> 
> The "problem" that I have had over the past 6 months is that having waited patiently to buy something, you take the opportunity, and then find the market settles and you get a big jump in price (20-40%) in a very short period.  Though this is obviously good, having spent a long time researching the stock I find it difficult to let it go as a degree of attachment has occurred:bad:




Again, I know without a doubt that I'd feel likewise, and the unemotional aspect to technical trading suits my goals and personality.  I've found myself looking for fundamental reasons to hold a stock that has hit my exit criteria at times, and have to go back and revisit charts of shares I've sold in the past to remind myself why following the system works best for me.  



RottenValue said:


> To address this, my portfolio tracking sheet starts flashing red at me when a stocks SP has risen to a level higher than my system predicted it would reach in 3 years time (based on my original 15% pa requirements).  This indicates that the stock has moved from cheap to over-priced and it is time to take profits.
> 
> I still find it difficult to sell as my basic philosophy is to buy for long-term holds but applying the same discipline to selling as buying has meant that selling over-priced stocks (in my opinion of course) at least occurs now.  Still hurts when the price continues to increase after having sold




This is what I struggle to understand.  Having made a great entry, and being well in profit sooner than you thought, why cut your profit rather than maybe run a tightish trailing stop to keep you in the trade should it decide to return you 20%pa or more?  Do you have stats on how often your discipline has worked in your favour and have often you'd have been better off being naughty?  Would be interesting validation or not wouldn't it?


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## RottenValue (5 January 2013)

That is a good question and reality is that I have never bothered to track "what-ifs" after deciding to sell - gut feel is that in most cases I would have been better off holding but this goes against my basic philosophy.  I like my portfolio to be highly likely to generate 15% pa growth per year - once a stock is overpriced (in my opinion), it may keep increasing in price but not at my desired rate (I expect it to fall or flatline).

I know this may sound strange but my preference is for the stock to just slowly increase in value Year on Year so it stays in my value range so you never are put in the position of considering selling them as being over priced. 

As an example, I bought CCP in Feb last year for $4.70 back in February as it met my criteria. Good final year result reported, dividend paid and then it has jumped above $8 in November.  That's what I view it as being worth at the end of 2015 so couldn't justify holding it.  Price may go up or down from here (and it has!) but I wouldnt but it at this price so struggling to justify holding it.

Money off table, reallocate to stocks that offer greater likelihood off meeting my 15% pa guidelines.  I find the discipline helps even though I would have preferred a more gentle increase and hold it for years as still believe it is a good company, just overpriced.


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## Julia (5 January 2013)

RottenValue said:


> That is a good question and reality is that I have never bothered to track "what-ifs" after deciding to sell - gut feel is that in most cases I would have been better off holding but this goes against my basic philosophy.  I like my portfolio to be highly likely to generate 15% pa growth per year - once a stock is overpriced (in my opinion), it may keep increasing in price but not at my desired rate (I expect it to fall or flatline).
> 
> I know this may sound strange but my preference is for the stock to just slowly increase in value Year on Year so it stays in my value range so you never are put in the position of considering selling them as being over priced.
> 
> ...



With respect, it sounds rather as though you have at the outset decided on an approach and are determined to stick with it, even if there might be evidence that you could adapt it to be more profitable.

I know I started out with no regard for the usefulness of charts, but gradually realised I was missing out on a valuable resource.

There seem to be quite a few people with closed minds as to what is useful.  Personal choice, of course, but I just don't quite understand why you'd feel obliged never to concede there is something more to be learned.


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## Ves (6 January 2013)

Julia said:


> I'd have thought this was a given, but it does raise the question of how value investors buy into a company.
> Could one of you perhaps comment on this?  eg if you decide a company is trading below your IV, will you look at a chart to determine an appropriate entry and place a limit order accordingly?  Or is your lack of interest in the market price sufficient to render the actual entry point irrelevant?



I don't look at charts to make purchase or sell decisions.

This exposes me to "premature accumulation" (haha) but on the flip-side it also means I won't be left with an error of ommission and waiting for lower prices that do not happen.  

I am buying long-term streams of free-cash flow. If these are on offer for less than my intrinsic value calculations less an appropriate margin of safety (ie margin for error) then there is no reason why I should not _buy_ now. I am not going to sell these until my investment thesis is defeated.

The IV calculation is the very last thing that I do. In 99% of cases I don't even calculate an IV because my personal judgment tells me that it is irrelevant because I either do not understand the business or the future is too uncertain / not promising / it doesn't meet my risk management criteria.

If I do not buy when there are prices are on offer that meet my IV calculation then I am second guessing my whole process and there would be no point doing it all in the first place.


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## McLovin (6 January 2013)

Julia said:


> I'd have thought this was a given, but it does raise the question of how value investors buy into a company.
> Could one of you perhaps comment on this?  eg if you decide a company is trading below your IV, will you look at a chart to determine an appropriate entry and place a limit order accordingly?  Or is your lack of interest in the market price sufficient to render the actual entry point irrelevant?




I never look at charts, I find them distracting. The market price is of course of interest, it is what I will end up paying. The actual entry point, in terms of whether the SP has been moving up, down, sideways is not of interest to me.

I'm interested in swapping capital for cashflow. And I'm not too bad at it.



			
				Ves said:
			
		

> The IV calculation is the very last thing that I do. In 99% of cases I don't even calculate an IV because my personal judgment tells me that it is irrelevant because I either do not understand the business or the future is too uncertain / not promising / it doesn't meet my risk management criteria.



+1


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## tech/a (6 January 2013)

McLovin said:


> I'm interested in swapping capital for cashflow. And I'm not too bad at it.
> 
> 
> +1




That's the easy part.
Harder to preserve capital while 
Generating cash-flow.
Even harder increasing it.

Lose sight of capital preservation ( it's not a loss unless I take it )
At your peril.


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## Ves (6 January 2013)

tech/a said:


> That's the easy part.
> Harder to preserve capital while
> Generating cash-flow.
> Even harder increasing it.
> ...



I think you will find that a good value investor is a lot quicker to take a loss than you seem to be giving them credit.


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## McLovin (6 January 2013)

tech/a said:


> That's the easy part.
> Harder to preserve capital while
> Generating cash-flow.
> Even harder increasing it.
> ...




Of course capital preservation is important. When a business changes, I change my opinion. I just don't think I find it in a chart. I realise others do and I'm not planning on getting into a debate about it. The question was about whether value investors look at charts.


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## tech/a (6 January 2013)

McLovin said:


> Of course capital preservation is important. When a business changes, I change my opinion. I just don't think I find it in a chart. I realise others do and I'm not planning on getting into a debate about it. The question was about whether value investors look at charts.




The one thing I see as an issue is the same thing I 
See when value investors make a buy.

That's when it's recognized by the market as a whole
If ever.

Often " value " won't be recognized by the wider market 
And price continues to drop. Value investors continue to buy.

When the same value investor sees a change in the business
Then the same thing often occurs and the market as a whole 
Doesn't react in the way expected,by the time it is the business
Dynamic has altered again!

Ves
I just haven't seen it.

Not an arguement just an observation over the years that has been 
The driving reason I don't try to value a company---it's just too slow.
And far too time consuming.


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## burglar (6 January 2013)

tech/a said:


> ... And far too time consuming.




Before you've calculated fair value, the fun is over.


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## Ves (6 January 2013)

tech/a said:


> Ves
> I just haven't seen it.



Look at the ASZ thread.  I sold at 70 odd cents - and I admit I was slow selling.  But I still sold before the steam roller hit.  Look at the price now.


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## McLovin (6 January 2013)

tech/a said:


> The one thing I see as an issue is the same thing I
> See when value investors make a buy.
> 
> That's when it's recognized by the market as a whole
> ...




*shrug*

My observation and experience has been the complete opposite. Where there's value, it always gets recognised. Recognising value is a different story. There's a few on here who can do it, and they know who they are.

It's not easy, maybe TA is easier, I don't know. But I'd say that of those who attempt value investing, with no background in accounting or business, the fail rate will be very high.


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## Boggo (6 January 2013)

tech/a said:


> Not an arguement just an observation over the years that has been
> The driving reason I don't try to value a company---it's just too slow.
> And far too time consuming.




Agree entirely.
And the valuations (projected valuations ?) are based on data from the last six months and is usually another couple of months out date before the average investor gets to see it.

Every company is dependant on and influenced by market forces that they have little or no control over, numerous factors such as price to produce or price for product etc.
Any company can have all the P/E's, poggys and other items that look great in a report but the bottom line for anyone is - what is the actual share price doing. You can't trade any of those warm fuzzy feeling producing ratios etc that get quoted regularly.

An old favourite stock that I had a great run with years ago was Fleetwood (FWD).
I have attached a weekly chart of it below and I have inserted an extract from a publically available current summary based on what seems to be accepted as recent data.

The misleading bit is that the data is based on when the company was growing and getting new contracts etc., that has come to an end - temporarily maybe but it is what is occurring, at some point they must plateau, have they reached that point - the price (actual value) has.

Until that new reality is distributed belatedly to the unwashed there is only one reliable item avalilable at any point in time - the actual stock price and its behaviour.

In the pic below, which is accurate at the moment, the price or the text ?
The text information is accurate based on the period of data that is being referred to but it is out of date and bears no resemblance to their current situation or that of the sector they are dependant on.
The only barometer of reality at any point is the share price.

The current stock price is back to where it was in mid 2010 (no allowance made for dividends - or inflation).

(Weekly chart - click to expand)


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## McLovin (6 January 2013)

FWD...

All you had to do was look at margins and you wouldn't have touched it. I wrote about that very fact on some thread, which I can't find now. Not rocket science, at least to me.


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## So_Cynical (6 January 2013)

Boggo said:


> An old favourite stock that I had a great run with years ago was Fleetwood (FWD).
> I have attached a weekly chart of it below and I have inserted an extract from a publically available current summary based on what seems to be accepted as recent data.
> 
> The misleading bit is that the data is based on when the company was growing and getting new contracts etc., that has come to an end - temporarily maybe but it is what is occurring, at some point they must plateau, have they reached that point - the price (actual value) has.
> ...




So what's it going to be Boggo...what are the charts telling you?, care to make a 12 month prediction?

Fleetwood is a company at the crossroads, i have been watching with increasing interest over the last 6 months and FWD has been on every new stock short list that i have drawn up in that time.


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## Boggo (6 January 2013)

McLovin said:


> FWD...
> 
> All you had to do was look at margins and you wouldn't have touched it. I wrote about that very fact on some thread, which I can't find now. Not rocket science, at least to me.




Its OK, the daily chart told me something was changing in Feb 2011


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## McLovin (6 January 2013)

Boggo said:


> Its OK, the daily chart told me something was changing in Feb 2011




Well there you go. So there really is more than one way to skin a rabbit.

What was the point of posting that chart then?


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## Boggo (6 January 2013)

So_Cynical said:


> So what's it going to be Boggo...what are the charts telling you?, care to make a 12 month prediction?




Actually, if I apply one form of analysis to the weekly chart the current pattern looks quite good, I would put it on a secondary list at the moment.


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## Boggo (6 January 2013)

McLovin said:


> What was the point of posting that chart then?




Just to confuse you and in case you didn't study up on the margin


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## McLovin (6 January 2013)

Boggo said:


> Just to confuse you and in case you didn't study up on the margin




OK. Very good. 

My favourite is when you highlighted how bad "dividend" investor had done by buying TLS at $9+.

https://www.aussiestockforums.com/forums/showthread.php?t=24409

I have no idea about TA, at least I admit it.


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## Boggo (6 January 2013)

McLovin said:


> OK. Very good.
> 
> My favourite is when you highlighted how bad "dividend" investor had done by buying TLS at $9+.
> 
> ...




That's a MARGINally better effort or is it a MARGINal improvement


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## McLovin (7 January 2013)

Boggo said:


> That's MARGINally better effort




That's missing an "a", which leads me to believe you should lay off the Sunday sherbets.


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## Boggo (7 January 2013)

McLovin said:


> My favourite is when you highlighted how bad "dividend" investor had done by buying TLS at $9+.




And just to let you know that TLS and I are now best of friends (TLSIOI around $2.20 atm).
Now, can we get back to the actual topic where I was attempting to highlight that the data ratios etc are usually based on are too far out of date to be of any value in making a price prediction.


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## McLovin (7 January 2013)

Boggo said:


> And just to let you know that TLS and I are now best of friends (TLSIOI around $2.20 atm).




Good for you. 



Boggo said:


> Now, can we get back to the actual topic where I was attempting to highlight that the* data ratios etc are usually based on are too far out of date to be of any value in making a price prediction*.




Any ratio will be of little value in making price predictions. Has anyone actually said they are?


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## cynic (7 January 2013)

Well yes there are those whom differentiate between price and value, and then there are those that interpret the current market price as an accurate representation of perceived "value".

Given that I trade using leveraged market instruments (as do many market participants), the associated margin requirements generally oblige subscription to the latter philosophy.


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## robusta (7 January 2013)

RottenValue said:


> That is a good question and reality is that I have never bothered to track "what-ifs" after deciding to sell - gut feel is that in most cases I would have been better off holding but this goes against my basic philosophy.  I like my portfolio to be highly likely to generate 15% pa growth per year - once a stock is overpriced (in my opinion), it may keep increasing in price but not at my desired rate (I expect it to fall or flatline).
> 
> I know this may sound strange but my preference is for the stock to just slowly increase in value Year on Year so it stays in my value range so you never are put in the position of considering selling them as being over priced.
> 
> ...




I operate much the same way, although got out of CCP at $5.84 back in April to buy something not so good. Just wondering aloud, in the future if a stock is over priced and there is nothing else you could find that meets your criteria would you consider a trailing stop then?
For my I am not so sure as I am paying interest on my money so will probably just continue to take profits when some holdings become over valued.

The other thing to think about is something I read a while ago in Common Stocks and Uncommon Profits by Phillip Fisher

"I remember my sense of shock some half-dozen years ago when I read a [stock] recommendation to sell shares of a company . . . The recommendation was not based on any long-term fundamentals. Rather, it was that over the next six months the funds could be employed more profitably elsewhere." 

Read more: http://www.investopedia.com/university/greatest/philipfisher.asp#ixzz2HHyqKHZa

Having trouble finding the other quote I was thinking about but I think it said something like if you hold a truly outstanding business (read competitive advantage) and it sells for a high multiple, why sell? Chances are it will trade for a high or higher multiple at some point in the future.


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## RottenValue (8 January 2013)

In regard to using a trailing stop, I never have used one and suspect that I never will.  Not that I am against them for any reason, just that I tend to be either all in or all out with my stock choices.  

When I buy it tends to be in 50K+ amounts so that profits are meaningful (I already have a fair amount invested in the market) and when I decide to sell I get out of the stock all together and move on.

No idea whether this is a good, bad or indifferent approach, but it works for me.  I have been essentially fully invested over the past two years, but I can see a gradual move to cash occurring over the next 6 months as I no longer have blindingly obvious ideas to invest in and a number of investments are moving to the fully valued level.


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## skc (8 January 2013)

RottenValue said:


> In regard to using a trailing stop, I never have used one and suspect that I never will.  Not that I am against them for any reason, just that I tend to be either all in or all out with my stock choices.
> 
> When I buy it tends to be in 50K+ amounts so that profits are meaningful (I already have a fair amount invested in the market) and when I decide to sell I get out of the stock all together and move on.
> 
> No idea whether this is a good, bad or indifferent approach, but it works for me.  I have been essentially fully invested over the past two years, but I can see a gradual move to cash occurring over the next 6 months as I no longer have blindingly obvious ideas to invest in and a number of investments are moving to the fully valued level.




Do you know what trailing stop means? With trailing stop you do most usually sell the whole parcel.


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## RottenValue (9 January 2013)

What I meant was that when I decide to sell, I sell.  In essence, my sell decision is being driven by my view that the risk /  reward balance for the investment is no longer in my favour.  Or put another way, a belief that any future return will not be delivered at my hurdle rate.

A few extra pennies might be nice but having decided to move on, I take my profits (or my loss) and focus on the next target which is more likely to meet my hurdle rate.


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## tech/a (9 January 2013)

RottenValue said:


> What I meant was that when I decide to sell, I sell.  In essence, my sell decision is being driven by my view that the risk /  reward balance for the investment is no longer in my favour.  Or put another way, a belief that any future return will not be delivered at my hurdle rate.
> 
> A few extra pennies might be nice but having decided to move on, I take my profits (or my loss) and focus on the next target which is more likely to meet my hurdle rate.




A trailing stop does exactly that.
as does an exit---due to whatever findamental reason.
as does a price target.

Whats a hurdle rate?


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## tech/a (9 January 2013)

RottenValue said:


> What I meant was that when I decide to sell, I sell.  In essence, my sell decision is being driven by my view that the risk /  reward balance for the investment is no longer in my favour.  Or put another way, a belief that any future return will not be delivered at my hurdle rate.
> 
> A few extra pennies might be nice but having decided to move on, I take my profits (or my loss) and focus on the next target which is more likely to meet my hurdle rate.




A trailing stop does exactly that.
as does an exit---due to whatever findamental reason.
as does a price target.

Whats a hurdle rate?


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## burglar (29 September 2013)

tech/a said:


> ... Whats a hurdle rate?




I don't know, ...

What does a Greek urn?


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## Buckfont (29 September 2013)

burglar said:


> I don't know, ...
> 
> What does a Greek urn?




Dunno, less than ewer?


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## Country Lad (29 September 2013)

tech/a said:


> Whats a hurdle rate?




Whatever time Sally Pearson finishes the race.


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## Ves (29 September 2013)

tech/a said:


> Whats a hurdle rate?



It's the minimum acceptable rate of return required before one would decide to commit to an investment / project vs doing something else  (ie. staying in cash).

You run a business and talk frequently about "risk adjusted returns"  -  I'm fairly sure you have your own hurdle rate,  but perhaps didn't realise that that is what it is called.


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## Country Lad (29 September 2013)

Ves said:


> It's the minimum acceptable rate of return required before one would decide to commit to an investment / project vs doing something else  (ie. staying in cash).
> 
> You run a business and talk frequently about "risk adjusted returns"  -  I'm fairly sure you have your own hurdle rate,  but perhaps didn't realise that that is what it is called.




You spoiled a run of fun.  I am sure all here knew what it was or looked it up.


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## Ves (29 September 2013)

Country Lad said:


> You spoiled a run of fun.  I am sure all here knew what it was or looked it up.



Oh,  sorry I forgot.   You try to contribute on here and get ridiculed for your effort.   Back in my hole.


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## Boggo (29 September 2013)

Here is a simple concept, you will know when the target price has been reached because it will show you.
https://www.aussiestockforums.com/forums/showthread.php?t=16501&p=766395&viewfull=1#post766395

Had the profits continued to run then obviously I wouldn't have sold.

Target price recognition, trend reversal, profit taking and re-entry all in a colour piccy.
Reputation (trader), brokerage fees, investor mentality and CGT, all factors that need to be considered


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## burglar (29 September 2013)

This hurdler rates very highly!


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## tech/a (29 September 2013)

Ves said:


> It's the minimum acceptable rate of return required before one would decide to commit to an investment / project vs doing something else  (ie. staying in cash).
> 
> You run a business and talk frequently about "risk adjusted returns"  -  I'm fairly sure you have your own hurdle rate,  but perhaps didn't realise that that is what it is called.




Thanks "V" 
Your spot on never heard of it.


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## Boggo (29 September 2013)

tech/a said:


> Thanks "V"
> Your spot on never heard of it.




How have you managed to run a couple of successful businesses without knowing that tech/a 

(Saw your new TV ad last night too - I've retained the number  )


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## tech/a (29 September 2013)

Boggo said:


> How have you managed to run a couple of successful businesses without knowing that tech/a
> 
> (Saw your new TV ad last night too - I've retained the number  )




Dumb luck!

TV 
Very powerful medium.


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## cynic (29 September 2013)

I've known people with business acumen to understand concepts without ever having encountered the labels ("positive expectancy" is one such label that springs to mind). 
At the same time I've witnessed people chanting labels, whom, upon interrogation have demonstrated an absence of understanding of the underlying concept (yet again "positive expectancy" springs to mind).


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## tech/a (29 September 2013)

cynic said:


> I've known people with business acumen to understand concepts without ever having encountered the labels ("positive expectancy" is one such label that springs to mind).
> At the same time I've witnessed people chanting labels, whom, upon interrogation have demonstrated an absence of understanding of the underlying concept (yet again "positive expectancy" springs to mind).




You've picked a classic there Cynic.
Agree completely.
Hypothetical v Actual


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