Stop losses - non negotiable?

I've been reading up on stop losses and the importance of them. But I'm wondering how they work in the real world. (ok.. that probably sounds dumb). Say today, with just about everything on my watchlist falling.. Would you guys have cut your losses and sold? Or do you allow for these 'bad days' and if you know your stock well enough, ignore the stop loss and hold onto it awaiting a rebound? At what point is this following emotion.. or making a clean decision?

My stop losses are non-negotiable. I would never ignore my best friend

Depends alot on various things imo.

Timeframe - Intraday, EOD, Weekly
Type of trading - Swing, Breakout, Longer term trend following etc.

There are various types of stops you can use.
IE - Trailing stop, EOD stop etc.

Which one works best depends on how you trade, what timeframe you trade and what your trading objectives are.

For me today I only had 1 stop hit, depends on how tight you run your stops.

All a stop really is, is a point where you realise you are wrong or the trade is going against you and you can get out protecting your capital and/or profit, keeping you in the game.

Stops are a vital part of trading imo. Just look at some of the posts on the BNB/BBP thread to what can happen if stops aren't used, some of the posters were talking about getting out while prices were alot higher but held on in hope and not wanting to take a loss.

Edit - Good comment Timmy

Hello all, New to firum and finding my way around. Reading with interest stop losses.
R

Thanks.

Timmy - obviously where I need to get to. At the moment stop losses feel like a painful little sister rather than a best friend!

nomore4s - I think I understand what you mean about it differing on the type of trading etc. I haven't actually defined what sort of trader I am.. and on the quickest of quick searches.. I think swing trading describes me best.

But I fear I'm playing a very dangerous game. I've been making money on cheap cheap stocks that have a spread of 1 or 2 cents. I can see the potential for huge loss tho, because by the time a downward trend is established, as opposed to it just bouncing around a couple of cents.. it's a big % gone.

*sigh* I can see a complete overhaul of how I trade coming. I seriously need to trade 'safer'. Even tho I've had good success.. I'm not covering myself for the potential huge losses which could probably quickly erase my profits!

OK.. so stop losses should be non negotiable.. just need to learn where to place it so I'm confident that that's it.. time to pull out.

Thanks

RocketGirl said:

Thanks.

Timmy - obviously where I need to get to. At the moment stop losses feel like a painful little sister rather than a best friend!

nomore4s - I think I understand what you mean about it differing on the type of trading etc. I haven't actually defined what sort of trader I am.. and on the quickest of quick searches.. I think swing trading describes me best.

But I fear I'm playing a very dangerous game. I've been making money on cheap cheap stocks that have a spread of 1 or 2 cents. I can see the potential for huge loss tho, because by the time a downward trend is established, as opposed to it just bouncing around a couple of cents.. it's a big % gone.

*sigh* I can see a complete overhaul of how I trade coming. I seriously need to trade 'safer'. Even tho I've had good success.. I'm not covering myself for the potential huge losses which could probably quickly erase my profits!

OK.. so stop losses should be non negotiable.. just need to learn where to place it so I'm confident that that's it.. time to pull out.

Thanks

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The way your trading atm while making money now can be a dangerous game imo. You only need 1 trade to gap against you or go into a trading halt and then gap down on bad news and you could lose your profits on many trades or worse all at once.

This is the idea behind the 2% rule, positon sizing, risk to reward etc, etc.

As a rough guide to how I trade - I trade on 1% risk of total capital and won't take a trade unless my target (my target is only a guide - not where I will definetly take profits) is 3x my risk although on shorter trades I will settle for 2.5x. (I'm not suggesting this is how you should trade - just how I trade but I trade totally different set ups to you)

Nick Radge has alot of wisdom on this matter, his book (Adaptive Analysis) is worth a read, you should be able to buy it from the ASF bookshop.

Good luck

A lot depends on what sort of trader you are. Short to medium term trades you would definitely use stop losses. But for long term I don't worry so much as the market is always fluctuating.

I always use a trailing stop loss to lock in my profits.

Hope that helps.

just going thru this exercise myself, as a new trader.

for short term trades, in volatile stocks, am considering 2 basic methods, for short term trading.

one method based on 2*ATR to 3*ATR, other on 10% trailing stop,

preferring to hang them of the intra-day high.

hopefully soon will have backtesting software on hand to test.

have found it to be quite a dilemna, as I trade intra-day within the account as well, used 3% initial stop, and 1:1.5 R/R for that.

havent had time to fully analyse the results...that can be confounding as well..a trade closed or opened can look good the next day, then bad a week later etc (profit about 27% over 6 weeks so far)

did leave lots of profit on the table, but at least it was profit.

10% stop out hurts I can tell you, but it would have been worse if i hadnt.

hard work to trade volatile spec stocks on tight stops

good luck tony

Even though i am new but i have been on the sidelines for a while-

Wether i am in it for the short or long time i won't leave home without the stop-

i got put on a trading plan from Nick Radge & my dad and i cant tell u how relaxed and mind free i am knowing that if i am out i am out-simple as that-i just move on to something else-

but on the other hand everyone is different and others will use a tight stop even on a top stock like bhp,rio and others will take a bit more on the chin-

i do know that to be good at this game u find whatever u are looking for that suits u (well to me that is)

also look at it from this view if u get stopped out ----look for something else with whatever money u have lefted-beats finding a good stock with no capital

but like i said everyone is different-its just my view on how i operate---

Thanks--

Nick--(melb)

Stops are set to mitigate risk.

Why set a stop if your going to over ride it at your own discretion.
Its obvious in this thread that correct position sizing from initial stop placement isnt clear.
Risk isnt increased,regardless of position placement of an initial stop.
Trailing stops to mitigate loss of profit are another topic---not one I thought concerning Rocket.

Timeframe has nothing to do with why you should or shouldn't use stops.

Stop losses are non negotiable IF you set one!
Regardless of what happens next hour,day,week or month.

I trade predominately on fundamentals. If the fundamentals change in a way that changes my fundamental view of the stock then I'll exit fairly aggressively even if it means hitting the price down a little.

I also have money management stops and technical stops. I often do take a partial exit for these particularly if I'm still strongly bullish on the fundamentals. This will sometimes bring me out of the stock at different levels causing a reduction in the holding size. Sometimes I'll then re-enter again on technicals and/or fundamentals.

If the position is large vs the stocks liquidity then I try to feed it out over hours or days if I think the price will hold up - it depends a bit on how strongly my fundamental or technical view has changed and also the size of the trade/potential loss (if I see the potential for it to become a large loss quickly I'll get out more aggressively to limit the size of the loss).

Once you get used to taking stops it is quite freeing.

Taking a stop loss gives you money in exchange for worry - maybe not as much as you had at the start of the trade but like ripping off a bandaid the pain goes away pretty quickly - but the pain can mount up if you ignore the stop and let the wound fester (apologies for the gory analogy lol). It gives you the optimism to look for your next position. More often than not you will also have the opportunity to re-enter the stock at a lower price than where you took the stop.

The only other thing to be wary of is intraday stop farming exercises - though sometimes distinguishing between one and the other can be a bit tricky. Taking a partial stop is one option if you suspect you're seeing an intraday flushing exercise - but if its not a flushing exercise but an actual price fall then you might wear more pain on the remaining parts.


The thing to remember about a falling price is that it develops a momentum of its own that is independant of the fundamentals and is related to the psychology around the holdings of all those that are waiting patiently for the price to recover, or that have entered to get a 'bargain', or doubled up or averaged down etc. and this puts pressure on any subsequent price rises and can emphasis and exaggerate the size and duration of the fall or the length of time for the recovery (if there is going to be a recovery of course - not all stocks recover).

cuttlefish said:

Once you get used to taking stops it is quite freeing.

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Nice post cuttlefish.

Trading is a business. All business have expenses. Losses are an unavoidable trading expense. Trading is the only business out there where YOU get to set the cost of your expenses. Unique and very favorable but fools never see this because they are not in the trading business they are gambling.

If you carn't take your stops quickly and as planed you have no hope and are simply playing Russian Roulette.

The correct use of stops is something of interest, even if I do not actually practice them.

I do have a question about Stop loss when trading based on EOD Data.
If the EOD close is below the stop loss, it should be sold the next morning. If the stock opens above your stop, do you still sell and thin yourself lucky the slippage went your way, or hold on?

In terms of slippage, do you need to take that into account with position sizing. If my 1% rule says I can buy 10,000 amount, should I reduce that amount slightly to account for slippage?

Cheers,
Brett

brettc4 said:

I do have a question about Stop loss when trading based on EOD Data.
If the EOD close is below the stop loss, it should be sold the next morning. If the stock opens above your stop, do you still sell and thin yourself lucky the slippage went your way, or hold on?

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Brett,
I trade EOD and for me I would have been exited, as I place my stop loss orders into my trading system straight away after I have be filled.
So to me this exit means that I was wrong with my judgment on the trade. Even if the next day it opens higher it may still close a lot lower.

To me if you use stops, they are part of your plan so they have to be followed to the letter, if not you are not following your plan.

Thanks heaps everyone. I especially like the explanation of it being a business and being in control of the expenses. I can relate to this, having worked for an accountant for nearly 10 years, and running small businesses from home

Well, the time finally came.. we've had a couple of stocks plummet. And being what they are, it doesn't take much for the loss to grow big. LOL *sigh*.

I also liked the bandaid analogy - as gross as it was Coz right now, I'd love to just have some money back, to put to work somewhere else. So yeah.. just gotta get my head around accepting small losses in order to free up my money to keep trading.

We're probably gonna sit it out for a bit (and until we get some of that money back LOL) and will work on some exit strategies, and research some more expensive stocks which will allow tighter stops.

Thank you!

Most has been covered here already, but some absolutes in regards to stops and trading;

1. If you do not know in advance exactly when you will exit a trade you must not enter it. The entry is easy, but the exit is where you make your money.

2. Stops are only part of the equation - they need to be coupled with money management.

3. Within limits, a wider stop works better than a closer stop. This is contrary to "common sense" or "gut feel".

4. Taking a small loss means that you are one step closer to taking a big profit.

MichaelD said:

Most has been covered here already, but some absolutes in regards to stops and trading;

1. If you do not know in advance exactly when you will exit a trade you must not enter it. The entry is easy, but the exit is where you make your money.

2. Stops are only part of the equation - they need to be coupled with money management.

3. Within limits, a wider stop works better than a closer stop. This is contrary to "common sense" or "gut feel".

4. Taking a small loss means that you are one step closer to taking a big profit.

Click to expand...

I understand what you're saying, but I've always thought it seems a bit premature to set an exit point in a trade without seeing exactly what the price will do. It is all well and good to have a guestimate of where you think the stock is capable of going within a time period, but if it doesn't do what you expect, shouldn't you wait and see? I'm not talking about letting a loss continue in the hope it improves by the way, I mean if the stock is doing better than expected.

Say you invest in a stock at $1 a share and estimate it will make it to $1.30 within 3 months. After 3 months, it has hit $1.50 and shows no sign of stopping. Do you sell, having more than hit your estimate, or do you let it go a bit longer, to see where it tops? Obviously there is no simple answer, as it may top at 1.52 and then immediately fall to 1.40 again, in which case you WOULD have been better off selling at $1.50. But as long as you have your finger on the sell trigger, surely it is better to continue to look for the ceiling than to sell at the estimated price based on your best guess 3 months ago.

So while it is good to have an expectation of where the stock may go, I don't think its a good idea to immediately sell at the point. Setting stop losses are a different story though. An appropriately set stop loss being triggered means you were dead wrong, not right.

I think, MickyD is talking about initial stops, not profit targets.

I agree with HowardBandy personally, if looking for short-term trades (used predominately in a choppy market), targets are important.

If looking to catch a larger trend, then letting price action stop you out through some form of trailing stop is best.

I think the point is know what your exit strategy is going to be in advance. e.g. 5% initial stop convert to 10% trailing stop once profit target of $x is reached - so it doesn't need to be a fixed price. (and if you use fundamentals as I do it may be related to events that affect the fundamentals as well).

yes if it helps you to limit your losses

no if it prevents you from making a profit

once you set your trading plan and your stop loss and you exit because your stop loss has been triggered you should stick to that and sit on the sidelines for a while

if in 1 or 2 months the stock recovers and achieves a profit / hits your target price then you should reconsider the process you are using to calculate that stop loss

if on the other hand in 1 or 2 months the stock continues to fall then it just confirms that you made the right choice

definitely helps to have a routine for when you make a loss so you can learn from your mistakes

i trade mainly speculative stocks so i try to think about where the "insiders" are buying in and what they would use as their stop loss and then i set my stop loss accordingly