Stop-Loss strategies

[Timmy]

Can you elaborate on this more for us newbies please Timmy?

And I just love examples for my simple noggin.

Sorry mnut - missed this one. What is said in the quote in that post ties in with my first post in this thread, it is more about the philosophy on the purpose of a stop loss.

I think most use a stop loss as a 'set-and-forget', that is, I have set my stop loss at $x.xx, now I will let the market do its thing and see what happens (if the price gets to $y.yy I will move my stop loss up, and so on). So, if a share (or CFD, future, whatever) was bought and it fails to rally from the buy price and starts to trade opposite to what I thought that is ok because my stop loss is there as protection. When the share falls to my stop-loss that 'proves' that buying the share was the incorrect thing to do and so the position is exited.

What I am saying is do not use this philosophy.

By all means set a stop loss upon entry. But then, if the share that has been bought fails to rally from the buy price and starts to trade opposite to what it 'should' be doing - get out, don't wait for the stop to be hit - the price must move to show that the idea of buying the share was right, the share price move must 'prove' that buying the share was the right thing to do. (this is the opposite to waiting for the share price to prove that you were wrong).

Now, this philosophy will not work with all approaches - how do you back-test such an idea - I don't think you can. So those that do extensive back-testing and model design and then trade those models will not use this approach.

What about fundamental/value traders/investors? I don't think they can use this approach either. If a share is bought because it represent great value then any further price fall, with no observable change in the fundamentals, means the share is even better value now, right? On the other hand, if an observable change in the fundamentals show that the share is no longer good value then the share will be sold, rather than waiting on a stop to be hit.

The philosophy is also not written in stone - many will disagree with it.

Hope that helps (clear as mud?)

 

[chops_a_must]

What do you mean, I need a girl.

What are you thinking? :

 

[meganut]

Ok MN i'll try my best.

Using round, unrealistic figures for ease.

You buy X shares at $1.10, with a stop at $1. The price rises and you sell your full amount of X at $1.50 (or whatever). You dont take your stop out for selling those X shares at $1.

the SP then falls to $1 and the system will automatically sell (or open up a short position) for those X amount of shares from originally.

So by leaving your stops in, if they get hit, you will take an opposite position to what you originally had.

Thanks for the great replies guys, I know you can sell a CFD when you really don't have them but I thought with shares you have to have a registered holding in a CHESS account in order to sell some shares, hence if you already sold them or can they work just like a CFD trade but in reverse if you leave the stop in place?
I think my head is about to explode!!

 

[meganut]

Sorry mnut - missed this one. What is said in the quote in that post ties in with my first post in this thread, it is more about the philosophy on the purpose of a stop loss.

I think most use a stop loss as a 'set-and-forget', that is, I have set my stop loss at $x.xx, now I will let the market do its thing and see what happens (if the price gets to $y.yy I will move my stop loss up, and so on). So, if a share (or CFD, future, whatever) was bought and it fails to rally from the buy price and starts to trade opposite to what I thought that is ok because my stop loss is there as protection. When the share falls to my stop-loss that 'proves' that buying the share was the incorrect thing to do and so the position is exited.

What I am saying is do not use this philosophy.

By all means set a stop loss upon entry. But then, if the share that has been bought fails to rally from the buy price and starts to trade opposite to what it 'should' be doing - get out, don't wait for the stop to be hit - the price must move to show that the idea of buying the share was right, the share price move must 'prove' that buying the share was the right thing to do. (this is the opposite to waiting for the share price to prove that you were wrong).

Now, this philosophy will not work with all approaches - how do you back-test such an idea - I don't think you can. So those that do extensive back-testing and model design and then trade those models will not use this approach.

What about fundamental/value traders/investors? I don't think they can use this approach either. If a share is bought because it represent great value then any further price fall, with no observable change in the fundamentals, means the share is even better value now, right? On the other hand, if an observable change in the fundamentals show that the share is no longer good value then the share will be sold, rather than waiting on a stop to be hit.

The philosophy is also not written in stone - many will disagree with it.

Hope that helps (clear as mud?)

Yeah great reply Timmy, the mud is getting clearer but I am really having trouble getting my head around the stops getting hit thing then buying you in in the opposite direction, man lucky I have started off small and not jumped in with both feet!