# Stop losses and their effect on price



## MrCho (14 November 2009)

Hi, I'm new to the share market. A bit about me. I'm an fairly new accountant, but I've managed to save up a fair bit to start trading. I've read the basics of both fundamental and technical analysis. They're both pretty interesting views. 

I have a query about stop losses. My basic understanding is that a stop loss protects your loss or a trailing stop loss will lock in your profit while protecting yourself from risk. If your a purely fundamental trader, it makes no sense to put in a stop loss. If the underlying value of the company doesn't change, it actually makes sense to average down. Instead of selling stock, buy stock when it moves down, so long as the underlying value does not change. Mr Market acts irrationally sometimes in the short-term but eventually price will move upwards to reflect fundamental value. Technical analysis views it differently. A stop loss is important to protect risk. A stock can trade on momentum. That's the basic gist of what i understand. Please correct me if i'm wrong. 

Here's my question. If there are alot of traders using stop losses on stock. *Once it reaches a below a certain price, won't the stock be heavily oversold? *The stop loss creates a big selling momentum which will undervalue the stock from a fundamental point of view.


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## So_Cynical (14 November 2009)

*Re: Stop losses and its effect on price*

Hello MrCho and welcome to ASF...great first post and i 100% agree with its content.

Many newcomers don't understand the diversity of trading/investing styles that are practised by the many people involved with buying and selling shares....it will take a while for u to get your head around the many different philosophy's and disciplines they follow. 

One such discipline is called "trend following" and to be a successful trader following this discipline one must follow the rules of trend following and limit losses by selling when a certain loss point has been arrived at, the rules of trend following are all important as any break from the rules is a break from the system and there fore could be considered gambling.

As for your question, once again i agree, but what u have to understand is that trend followers don't make value judgements, fundamentals are irrelevant to them...its all about the price action and capital protection.

As for myself, im happy to hold and average down and wait for the market to catch up with me and give me my just rewards....as it now is.


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## all$andnocents (16 November 2009)

*Re: Stop losses and its effect on price*

i'm no expert but you'd hope once the price drops to certain limits there'd be people on the sidelines thinking that there's value to be had.

correct me if i'm wrong (not that needs to be said here!)


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## cutz (16 November 2009)

*Re: Stop losses and its effect on price*



all$andnocents said:


> i'm no expert but you'd hope once the price drops to certain limits there'd be people on the sidelines thinking that there's value to be had.




Yeah, 

Nine times out of ten that's what's meant to happen but occasionally it appears  that there's no value at any price.


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## AlterEgo (16 November 2009)

MrCho said:


> Hi, I'm new to the share market. A bit about me. I'm an fairly new accountant, but I've managed to save up a fair bit to start trading. I've read the basics of both fundamental and technical analysis. They're both pretty interesting views.
> 
> I have a query about stop losses. My basic understanding is that a stop loss protects your loss or a trailing stop loss will lock in your profit while protecting yourself from risk. *If your a purely fundamental trader, it makes no sense to put in a stop loss. If the underlying value of the company doesn't change, it actually makes sense to average down. *Instead of selling stock, buy stock when it moves down, so long as the underlying value does not change. Mr Market acts irrationally sometimes in the short-term but eventually price will move upwards to reflect fundamental value. Technical analysis views it differently. A stop loss is important to protect risk. A stock can trade on momentum. That's the basic gist of what i understand. Please correct me if i'm wrong.
> 
> Here's my question. If there are alot of traders using stop losses on stock. *Once it reaches a below a certain price, won't the stock be heavily oversold? *The stop loss creates a big selling momentum which will undervalue the stock from a fundamental point of view.




If you've read a number of trading books, you should have read in at least one of those books to *never *average down. It's the biggest mistake that beginners make, and often results in them losing very large sums of money. Yes, it *usually *works....... until it doesn’t, and the time it doesn’t you find you have most of your capital tied up in a downward trending stock (because you’ve been buying more and more all the way down), which can often stay down for years or go bankrupt.

You say “If the underlying value of the company doesn't change…..”, but the problem with that is, how can you be sure that something hasn’t changed that you’re not aware of?


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## skc (16 November 2009)

MrCho said:


> Hi, I'm new to the share market. A bit about me. I'm an fairly new accountant, but I've managed to save up a fair bit to start trading. I've read the basics of both fundamental and technical analysis. They're both pretty interesting views.
> 
> I have a query about stop losses. My basic understanding is that a stop loss protects your loss or a trailing stop loss will lock in your profit while protecting yourself from risk. If your a purely fundamental trader, it makes no sense to put in a stop loss. If the underlying value of the company doesn't change, it actually makes sense to average down. Instead of selling stock, buy stock when it moves down, so long as the underlying value does not change. Mr Market acts irrationally sometimes in the short-term but eventually price will move upwards to reflect fundamental value. Technical analysis views it differently. A stop loss is important to protect risk. A stock can trade on momentum. That's the basic gist of what i understand. Please correct me if i'm wrong.
> 
> Here's my question. If there are alot of traders using stop losses on stock. *Once it reaches a below a certain price, won't the stock be heavily oversold? *The stop loss creates a big selling momentum which will undervalue the stock from a fundamental point of view.




If you are trading fundamental you are buying a company, so the "value" of a company matters. Having a stop loss based on price doesn't make sense in this case. But the mistake for most traders / investors using fundamental analysis is not knowing when they are wrong. They can't accurately assess how new information affects the value, and they are unwilling to part with their shares and take losses when they are proven wrong / likely to be wrong. So imo trading fundamental you still have a "stop". This stop is not based on a price level but should be based on fundamental information triggers (eg. falling sales, lower margins, new regulations etc).

With technical analysis, value doesn't matter that much as price is the only reality. As a technical trade you will have no hesitation buying a stock at $4.50, the same stock you just sold at $4 only last month. In this case the stop loss is most important and clearly should be price based. You will often see some obvious places for stop loss and once triggered the stock is rapidly sold off.

So either way you should have a stop loss - and the trigger of the stop depends on why you entered the trade in the first place.


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## motorway (16 November 2009)

skc said:


> If you are trading fundamental you are buying a company, so the "value" of a company matters. Having a stop loss based on price doesn't make sense in this case.





It would depend on how many shares / % of a company, You are buying and how quickly you want to do it...

What is wrong if you are only are buying 10,000 shares based on "Fundamentals"
and you use a PRICE stop...

It goes UP.... Fine

It goes down ... You make a small loss.. That's OK you have a TAX loss to claim. And when it stops going down You can Buy at a better price .

Of course if it does not stop going DOWN ?
Maybe there are those who know more than you !
OR Conditions , Bear Market ? Keep "Investors" ( real ones ) on the sidelines

Things to consider:

Market Trend
Sector Trend
Stock trend

& How many shares you want and how quick
If you are launching a takeover and need to keep others on the sideline
YES a Stop Loss is maybe a disadvantage.

If you want to BUY 10,000 shares and that's it..
because of the way Shares TRADE ( if you really want to buy JUST  a business you would have to buy into an unlisted one )
Such tactics as STOPS can be useful..

All you need is  Robust and Timely Indication of when something goes Down and When it Stops Going DOWN... ( note indication--not indicator...--> What you need is a robust and timely TREND definition )


Motorway


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## motorway (16 November 2009)

MrCho said:


> Hi, I'm new to the share market. A bit about me. I'm an fairly new accountant, but I've managed to save up a fair bit to start trading. I've read the basics of both fundamental and technical analysis. They're both pretty interesting views.
> 
> 
> Here's my question. If there are alot of traders using stop losses on stock. *Once it reaches a below a certain price, won't the stock be heavily oversold? *The stop loss creates a big selling momentum which will undervalue the stock from a fundamental point of view.





Mr Cho
Consider--->



> THE SOURCE OF LIQUIDITY
> 
> If all information had the same impact on all investors, there would be no liquidity.
> 
> ...




Motorway


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## MrCho (17 November 2009)

First of all, thank you for your replies. They're quite informative. I think i've barely scratched the surface 



AlterEgo said:


> If you've read a number of trading books, you should have read in at least one of those books to *never *average down. It's the biggest mistake that beginners make, and often results in them losing very large sums of money. Yes, it *usually *works....... until it doesn’t, and the time it doesn’t you find you have most of your capital tied up in a downward trending stock (because you’ve been buying more and more all the way down), which can often stay down for years or go bankrupt.
> 
> You say “If the underlying value of the company doesn't change…..”, but the problem with that is, how can you be sure that something hasn’t changed that you’re not aware of?




The line i've read in trading books about averaging down is that it's like sending more money down bad money. 

The way you've put it AlterEgo makes sense. That something that could of changed may not reflected in the underlying value. If you put it that way, then that's a huge flaw in the fundamental value perspective.


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## MrCho (17 November 2009)

what i got from skc is that - price stop losses don't make sense for buying using fundamental analysis. the stop loss should be based on the earning potential of the company. since technical analysis is based on price analysis, a price stop loss makes sense. fundamental analysis is based on earning potential (among other things), a stop loss should be based on these fundamentals. 



motorway said:


> All you need is  Robust and Timely Indication of when something goes Down and When it Stops Going DOWN... ( note indication--not indicator...--> What you need is a robust and timely TREND definition )
> 
> 
> Motorway




motorway, when you mention trend definition - are you referring to using technical analysis together with the fundamentals?


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## MrCho (17 November 2009)

motorway said:


> Mr Cho
> Consider--->
> 
> 
> ...




cheers for the liquidity blurb. answered my question


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## lukeaye (17 November 2009)

Hi there welcome,

For me as a technical trader, price is rarely wrong. There are maybe 1 out of 100 circumstances when i could say, the price is not reflecting what should be happening. Such occurances can be seen in arbitrage.

Having said that, price is subject to cause and affect. There is always a reason price will move, whether you can rationalise it is irrelevent, as alterego said, there are many people that will know things before the market does, or you.

There is alot that fundamentally makes no sense at the moment, but technically there as so many oppurtunites.


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## motorway (17 November 2009)

lukeaye said:


> Hi there welcome,
> 
> For me as a technical trader, price is rarely wrong. There are maybe 1 out of 100 circumstances when i could say, the price is not reflecting what should be happening. Such occurances can be seen in arbitrage.
> 
> ...






> price is rarely wrong




PRICE is ALWAYS WRONG esp for someone..

At best a Traded price can be seen  as a compromise
Where differences of opinion have agreed to disagree..

MrCHo --> What are Fundamentals and how do you trade them
                What are the technicals and how do you trade them..

In the markets   All anyone can do is BUY or SELL---> Shares


There are different Information Sets , Different Time Horizons
There are those who are better or less informed

But this all comes together because When anyone wants to act:

* They have to BUY or SELL*

* If all information had the same impact on all investors, there would be no liquidity. *

But there is Liquidity !



> Market dynamics are NEVER stationary. ( IE The price is always WRONG  It keep changing It has to keep changing)
> 
> Markets represent the intersection of many different and conflicting interests, expectations and behaviors. Instantaneous shifts in supply and demand determine price, moving the market toward thresholds (stopping, selling, buying) . Richard Olsen





So the Most Important Thing to know about a Market or a Stock ?
Given what a market is  ?



> Richard Wyckoff taught  that the most important thing anyone can know about a market or an individual issue is its trend and the position that it occupies in the trend.
> 
> The trend is the line of least resistance.  It indicates the direction in which the price wants to move.  Profits are more likely to be realized when positions are established that are in harmony with the direction in which the price has _already indicated it wants to move._





Just look at ( recent ) History

Motorway


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## lukeaye (17 November 2009)

motorway said:


> PRICE is ALWAYS WRONG esp for someone..
> 
> At best a Traded price can be seen  as a compromise
> Where differences of opinion have agreed to disagree..
> ...




Ok well i agree in that context, for me to buy and you to sell we are disagreeing on the value/price of the underlying. But even value is subjective, just because there is supply at a level does not mean that the seller or buyers believe this is the correct value of the stock, there can be buying or selling for another reason. But that does not make it wrong?
How can it be wrong if we have transactions?

Price is always right, what is right is dynamic though.

To me, for a price to be traded at that very moment, it is accurate in relation to supply or demand for that moment. 

Once again i think its a contextual interpretation.


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## kam75 (17 November 2009)

MrCho said:


> Here's my question. If there are alot of traders using stop losses on stock. *Once it reaches a below a certain price, won't the stock be heavily oversold? *The stop loss creates a big selling momentum which will undervalue the stock from a fundamental point of view.




There's no such thing as overbought or oversold.  Just supply and demand. And buying pressure or selling pressure.

For example.  A big newsletter stock tipping company may have just mailed out their Sell alert on BHP. Hundreds of their members follow the guru's advice religiously, like sheep, and set their stops at the same price.  The stop is triggered and their orders all go to the market.  So what. The price pulls back to an intraday low as the market absorbs the large share parcel before resuming to close near the high by the end of the day.


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## weird (17 November 2009)

MrCho said:


> Hi, I'm new to the share market. A bit about me. I'm an fairly new accountant, but I've managed to save up a fair bit to start trading. I've read the basics of both fundamental and technical analysis. They're both pretty interesting views.
> 
> I have a query about stop losses. My basic understanding is that a stop loss protects your loss or a trailing stop loss will lock in your profit while protecting yourself from risk. If your a purely fundamental trader, it makes no sense to put in a stop loss. If the underlying value of the company doesn't change, it actually makes sense to average down. Instead of selling stock, buy stock when it moves down, so long as the underlying value does not change. Mr Market acts irrationally sometimes in the short-term but eventually price will move upwards to reflect fundamental value. Technical analysis views it differently. A stop loss is important to protect risk. A stock can trade on momentum. That's the basic gist of what i understand. Please correct me if i'm wrong.
> 
> Here's my question. If there are alot of traders using stop losses on stock. *Once it reaches a below a certain price, won't the stock be heavily oversold? *The stop loss creates a big selling momentum which will undervalue the stock from a fundamental point of view.




If you had applied that theory to ONETEL, and other similar stocks (and there have been many ... anyone want to post ?)  ... and I wonder if you will be around to post further if you haven't learned otherwise


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## motorway (17 November 2009)

lukeaye said:


> Ok well i agree in that context, for me to buy and you to sell we are disagreeing on the value/price of the underlying. But even value is subjective, just because there is supply at a level does not mean that the seller or buyers believe this is the correct value of the stock, there can be buying or selling for another reason. But that does not make it wrong?
> How can it be wrong if we have transactions?
> 
> Price is always right, what is right is dynamic though.
> ...




So  there are trends because the Price is Always Right ?

*No* there are trends because the price is always wrong !

Yes in a static sense Price is "right"
But in a Dynamic Sense NEVER

There is always a Trend 
A Line of least resistance 

Why ? Because The price Right now is Always WRONG.
On All or *Certain* Time Horizons..

The Most dynamic trends might well
Occur when on ALL Time Horizons
The PRICE IS WRONG

Top of a Bull Market
Bottom of a Bear market

Motorway


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## weird (17 November 2009)

motorway said:


> So  there are trends because the Price is Always Right ?
> 
> *No* there are trends because the price is always wrong !
> 
> ...




MW, don't get that post, I don't wish to, and take u r in jest, but will tear u a new one if need 2.


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## nomore4s (17 November 2009)

weird said:


> MW, don't get that post, I don't wish to, and take u r in jest, but will tear u a new one if need 2.




Tear him a new one for what? Posting his views on a subject?

Maybe if you can't add anything constructive to a conversation you should just let it be.


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## motorway (18 November 2009)

weird said:


> MW, don't get that post, I don't wish to, and take u r in jest, but will tear u a new one if need 2.




Well What to Say 

maybe Nothing

But if Price is Right
There are No trends

Price  is right is part of  Strong Form of Efficient Market Hypothesis
And with that there are No Trends

I think Strong form of EMH is Wrong

I think there are Trends and I think Price is Best Seen Dynamically as Wrong
in the context of Futures Prices..
And Only Future Prices and TRENDS ( NEED BOTH )
Make trading $$$$

Trend --> Line of least resistance
Why is there a least resistance
Because There is High and Low
There is Always a Down hill
Even if with share prices That is UP

I see it has Looking at least TWO sides
 Price is RIGHT and WRONG

If it is Just Right 
Then EMH and NO TRENDS 




A traded Price IS a difference of opinion
 or do you think NOT ?
Do you think that a trade occurs when both Buy or Sell ?

Different Time Horizons are active YES

But that would be for a *Discussion *

Next Time Someone is Selling Something make sure you buy it 
because the price is probably right


Motorway


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## So_Cynical (18 November 2009)

motorway said:


> So  there are trends because the Price is Always Right ?
> 
> *No* there are trends because the price is always wrong !
> 
> ...




I like this concept, it makes some sense in that the price is always changing so never really reflects the real value of the "investment" which can never be accurately calculated at any given time.


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## Wysiwyg (18 November 2009)

> A traded Price IS a difference of opinion
> or do you think NOT ?
> Do you think that a trade occurs when both Buy or Sell ?



Yes there is difference of opinion in future price and hence the agreement on present price.


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## lukeaye (18 November 2009)

I agree with what you are saying motorway, that the constant battle between buyers and sellers creates trends etc. 

I am debating another side though, im debating from a fundamental valuation, you can never be right about the stocks price. The price is NEVER wrong compared to a valuation. That the price reflecting supply and demand is always right, not the valuation. Im saying that this is dynamic, so it makes it impossible to value a stock accurately.

As you said, if we had everyone agreeing on the same price, there wouldnt even be movements/ trends in price.


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## motorway (19 November 2009)

Price is Right 
Price is Wrong
?
Should I Buy should I sell..
?

Ok If your are succesfull trader

From now on Just Buy when you would have sold and Sell when you would have Bought..

Or even better find a succesful trader
and take the other side of their trades..

In Wyckoff's terms do the opposite of the Composite Operator

Model someone and do the opposite
Investors could do everything Buffet does but in reverse..

Buffet always thinks Price could be  wrong
Or maybe it is wrong 80%

BUT could be is not should be !

What might  reveal That Price is Wrong ?

The Study of Responses & The STUDY of TRENDS

*VOLUME Indications
Speed  of REACTIONS*

In fact the Study of responses
Reveal what Wyckoff called *Character*

Wyckoff Distinguished between Appearance
and Character

Character is what matters
And The Study of Responses is what reveals


Motorway




> "The study of responses ... is an almost unerring guide"
> 
> Rollo Tape (Richard Wyckoff), 1910


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## motorway (19 November 2009)

How many have seen 
Prices continue to Trend

Regardless of good news or bad ?

The Study of Trends is Such a Powerful Thing..

The PRICE CONTINUES TO TREND because ?

*The PRICE CONTINUES TO BE WRONG
*
It does not matter what the News / Fundamentals or our  *WISHES.*.
Might be or are..

What really matters
_Is what is not known..
_
What WE DON"T KNOW

Because Price will TREND Because Price is WRONG
We need to USE some form of a STOP

_regardless of the effect on the Share price..
_

IF we are on the Wrong side of a TREND
Then We will BE THE END..

LIFE ITSELF or anything ALIVE  IS A TREND
ALL Requiring Frequent STOPS

So as There will be _BETTER_ ENDS.. Than there might have been

Motorway


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## brty (19 November 2009)

lukeaye  	




> I am debating another side though, im debating from a fundamental valuation




But what accuracy is there in your valuation?? Again it is the unknowns that are at work against you. Your perception of the fundamental value can/will be completely different to another persons. How do you know if your information is better than theirs??

brty


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## beerwm (19 November 2009)

seems like motorway is saying 'buying/selling pressure' cant be expressed in PRICE instantly.
-thus the diffusion of pressure over time reveals a trend on a chart. liquidity.


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## beerwm (19 November 2009)

Fundamentals vs Techincals,

you can derive a statistical edge out of any combination of factors that effect market prices,

Index
[Announcements/Data/News] - Fundamentals
[Sentiment]
[Price] -Technicals

Stock
[Announcements/Data]
[Assets/Liabilities/Equity/PE/Management] -Fundamentals
[Dividends/Capital Raisings]
[Sentiment/Hype]
[Market Depth]
[Price] - Technicals

Most popular are technical factors as they are perhaps the easiest to interpret,


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## weird (19 November 2009)

Never become involved in any equity, move on ... find a pattern whether it be a move from a consolidation or continued move in momentum, whether trading futures or stocks, you go with wot moves, anything else is just wishing, and real traders make profits or losses on actually trades. Nothing ever fails under perfect analysis.


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## lukeaye (23 November 2009)

brty said:


> But what accuracy is there in your valuation?? Again it is the unknowns that are at work against you. Your perception of the fundamental value can/will be completely different to another persons. How do you know if your information is better than theirs??
> 
> brty




Thats what im saying?


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