Question for traders about stop losses?

[Realist]

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

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

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

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

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

 

[mit]

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

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

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

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

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

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

MIT

 

[mit]

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

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

 

[professor_frink]

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

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

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

No, this would not be wise at all.

 

[It's Snake Pliskin]

Also, you buy stocks because they are strong.

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

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

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

Hey Mit, where on the south coast are you?

 

[It's Snake Pliskin]

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

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

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

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

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

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

 

[mit]

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

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

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

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

Hey Mit, where on the south coast are you?

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


MIT

 

[Realist]

Thanks guys.

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

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

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

 

[Realist]

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

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

Every single stock I have is bright red!

 

[mit]

Not that It looked like a buy but some common stops

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

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


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

MIT

 

[mit]

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

Every single stock I have is bright red!

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

 

[Realist]

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

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

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

A colour blind person may think my portfolio looks good?

 

[cuttlefish]

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

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

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

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

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

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

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

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

 

[Kipp]

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

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

 

[cuttlefish]

yeah comsec has them.

 

[Julia]

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

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

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

Julia

 

[wayneL]

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

Julia

Julia,

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

 

[sails]

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

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

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

 

[Julia]

Julia,

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

Wayne

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

Julia

 

[barry593]

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