# Why You Need Stop Losses



## MichaelD (9 March 2008)

It is interesting to contemplate what the use of a stop loss has meant to my own personal trading over the last 12 months - the value of a stop loss has certainly been self-evident over the last 12 months of trading conditions for long term trend following systems (it isn't something that I need to prove to myself, but perhaps this post will help someone else "get the message").

Some of the highlights of my last 12 months of trading (the key messages of what these numbers mean is covered later in this post);

MGQ (now GMG) - sold @ 6.63 for a large profit, currently 3.85
SLX - sold @ 10.60 for a large profit, currently 5.55
BNB - sold @ 28.61 for a modest profit, currently 13.96
CBA - sold @ 54.02 for a small loss, currently 39.35
APN - sold @ 5.69 for a small profit, currently 4.80
PXS - sold @ 3.65 for a small profit, currently 2.42

Currently open and fully pyramided positions in;
CEY - bought @ 3.21 - 3.48, currently 4.40
IPL - bought @ 120.12 - 149.54, currently 158.00
MCC - bought @ 9.62 - 10.82, currently 12.75

Along the way, there have been lots of small losses and small gains, BUT NO LARGE LOSSES.


THE TAKE HOME MESSAGES

1. A stop loss prevents a small loss from turning into a large loss. That's its function. Occasionally it will give you a small loss in a share which then turns around and runs up without you. DOESN'T MATTER. A small loss will not hurt you. A large loss will.

If I had ignored any of the stop losses I had in place over the last 12 months, my trading capital would have been decimated. Instead, it's increasing even in these conditions.

2. Combining a stop loss with letting your profits run makes it mathematically inevitable that you will make a profit in the long run. I've had three big winners in the last 12 months; SLX, WOW and MGQ, and they have MORE than paid for all the small losses along the way.


It's not clever. It's not pretty. I can't boast about my stockpicking skills...but I am making profits and not hurting like many here.


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## Nick Radge (9 March 2008)

There is only one thing you can control when trading or investing...


...how much money you're willing to lose.


The only way to manage that is by using stop loss orders. Regardless of how smart you think you are, how good you think your analysis is, the outcome of any position is in the lap of the market gods.

What we're seeing is people finally realizing that their brilliance had more to do with the bull market and not with their own analysis.


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## Porper (9 March 2008)

MichaelD said:


> It's not clever. It's not pretty. I can't boast about my stockpicking skills...but I am making profits and not hurting like many here.




I don't know, most on here are only too happy to tell us that they are making good profits, even in the past few months.

You are absolutely correct of course.It is almost impossible to make a profit if you let losers run.I say almost impossible because the Bull market of the past 4 0r 5 years it was achievable, certainly not now.

In the long run it will wreck an account, just a time bomb waiting to blow.

I think this correction is a good thing in that it will get rid of the traders who think it is easy and don't put the effort in.Another 10% drop should do the trick.


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## MRC & Co (9 March 2008)

Porper said:


> I don't know, most on here are only too happy to tell us that they are making good profits, even in the past few months.
> 
> You are absolutely correct of course.It is almost impossible to make a profit if you let losers run.I say almost impossible because the Bull market of the past 4 0r 5 years it was achievable, certainly not now.
> 
> ...




I agree with these sentiments.

It all comes down to the context and cycle.

If it is a long-term fundamental stock and you beleive it is highly undervalued, it is also possible to make medium-long-term profits without setting stops.  But as soon as something comes up to change those fundamentals, get out and cut your losses (this is where many find it hard and look to luck and hope)!  Use TA to time your entry/exits.  I.e. Dont buy on a downtrend or if the stock starts to experience selling pressure after approaching a resistance point.  Try and buy once it starts bouncing off support, high volume always a good thing.

If trading based on current market/industry/sector/commodity/technical trends alone, definately set tight stops.  I.e.  With base/precious metal prices rising and doing well in this inflationary environment, I am ensuring tight stops encase a pop of this supposed "bubble" eventuates.  Of course, this is a medium-term trend I beleive (with no short-term end to this inflationary bull) and I would buy once more, at lower prices (once TA appears safe, refer above).

Just a few thoughts.  Any opinions welcome.


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## BBand (9 March 2008)

Hi Michael,
Nice to see that you are still making money in the current market with your long term trend following system - there are not so many good trends around at present. 

What do you term "fully pyramided" - do you limit yourself to x number of additional positions?, or a max %age of trading capital, or a max % risk?

Are your new positions the same dollar value?

Personally, I gave up trend trading a few months ago - now (when I trade) I'm just in for the move and at the 1st sign of price weakness or price approaching resistance or support I tighten my stop.

I never come out at a target price, I let the market take out my stop.

My main concern is to never let a winning trade become a loser, I am often taken out early, but if I get another entry signal - I'm straight back in (high probability trade)

Peter


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## MichaelD (10 March 2008)

Nick Radge said:


> What we're seeing is people finally realizing that their brilliance had more to do with the bull market and not with their own analysis.



Nah - the market's wrong or rigged/unfair (eg anyone who stayed long ABS in the last 12 months during the sustained downtrend). 



BBand said:


> What do you term "fully pyramided" - do you limit yourself to x number of additional positions?, or a max %age of trading capital, or a max % risk?
> 
> Are your new positions the same dollar value?



My long term trend following system risks 0.5% of capital per pyramid up to a total of 5 tranches (= approx 2.5% risk per fully pyramided position - fixed fractional position sizing). Works for me since I was able to backtest this to my satisfaction. Interestingly, it's very similar to the way Jesse Livermore built up a position (not that I knew that at the time I was defining my system).


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## snabbu (10 March 2008)

do you guys use a simple stop loss or a guaranteed stop loss I have seen a few examples like a big drop on opening where GSL has a big advantage over SL and well worth the extra fee. I wonder if this is common.

Cheers

Gary


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## tech/a (10 March 2008)

> Works for me since I was able to backtest this to my satisfaction.




How'd you do that?
If you have some code I'd appreciate it.

Thanks.


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## dutchie (10 March 2008)

G'day Porper

"I think this correction is a good thing in that it will get rid of the traders who think it is easy and don't put the effort in."

Why would you want to get rid of them - don't they help to swell your pockets?

Cheers

Dutchie


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## nizar (10 March 2008)

MichaelD said:


> Currently open and fully pyramided positions in;
> CEY - bought @ 3.21 - 3.48, currently 4.40




Hi Michael,

Is $3.21 on CEY your average price or that of your latest pyramid?

It may be of interest of you to check what CEY is currently trading at


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## Porper (10 March 2008)

dutchie said:


> G'day Porper
> 
> "I think this correction is a good thing in that it will get rid of the traders who think it is easy and don't put the effort in."
> 
> ...




Hello Dutchie,

Good point.............didn't think of it that way.If they all disappear I will be the new boy getting fleeced again


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## MichaelD (11 March 2008)

nizar said:


> Is $3.21 on CEY your average price or that of your latest pyramid?
> 
> It may be of interest of you to check what CEY is currently trading at



$3.21 was the initial entry and then pyramids were made each time the stock rose a further 4%.

CEY's current price - ROFL! I was going to add a "disclaimer" to the initial post that since these are all open trades, who knows what their ultimate outcomes will be. Mr. Market must have read the post and wants to play with my head.



tech/a said:


> How'd you do that?
> If you have some code I'd appreciate it.
> 
> Thanks.




Tech - sorry, unclear what bit you're after - how I tested pyramiding? or something else?


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## tech/a (11 March 2008)

> Tech - sorry, unclear what bit you're after - how I tested pyramiding? or something else?




Thanks Mike worked it out.


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