Stop Losses vs Closing Out

[ghotib]

If you know that you might be unable to monitor a trading portfolio regularly for a while, how do you decide whether to trust your stop losses or just to close out?

Your plan says you hold rising stocks until you get a specified signal to sell and that you reset stop losses to protect your profits. You set the stop losses by placing sell orders at a price, which can remain valid for up to a month.

I'm thinking of situations like expecting a new grandchild and when it arrives you'll be staying with the family to look after the older ones. You know that the disruption is coming but you don't know when, how long it will last, or what chance you'll have to use their computer. When the phone call comes, do you close out, do you trust your existing stops, or do you reset them? And if you reset them, is it tighter to increase the protection or looser to allow for normal fluctuations?

Thanks

Ghoti

 

[bullmarket]

Hi ghotib

I don't think there is one single right answer to your question.

I think what you do in that sort of situation basically boils down to 1) how much access you will have to monitor your holdings and 2) how well you want to sleep at night

But you do have a few options to help 'automate' protecting profits and minimising losses while you're away.

Commsec, and I imagine all other online brokers, has 4 different types of conditional orders - stop loss orders being 1 of the 4. The other 3 are Buy Gain, Supporting Buy and Resistance Sell. The other 3 give you a bit more flexibility on how you want to handle buy/sell orders if their trigger prices are hit. If you're a commsec client there is info and diagrams demonstrating how the 4 types of conditional orders work.

Personally I use trailing stop losses when I'm lucky enough to see a share price rising above my buy price. I read somewhere recently that some brokers can now automatically 'bump up' trailing stops in the event that a share price keeps rising. I'm not sure if commsec provide that service.

So as I said originally, I suppose whether you rely on conditional orders or close out any holdings boils down to how frequently you can monitor your holdings and how well you want to sleep at night.

Finally, I suppose once you decide on how to handle the scenario you painted it might be a good idea to write it into your trading plan in case a similar scenario eventuates in the future.

Good luck and hope this helps

bullmarket

 

[tech/a]

Been in exactly your position.
There is an answer.

If your trading short term then you'd close out as your trailing stops or stops or indeed exits will not have the latitude that a longerterm trading method would have.

So then if your trading longerterm (as I am) when travelling for long periods like I did in April,May and June last year I was faced with the same dilema.
I decided rather impulsively to close all positions which as the market fell made me feel very happy with myself.(from a trading veiw closing early by chance saved me considerable open equity loss).

However dumbo hadnt considered the aspect of capital Gains Tax and some I closed out were 10 mths old !!
So a rash impulsive act was the single most costly error I have made whilst trading.

I re opened all positions in July but damage done!

 

[dutchie]

Depending on the monetary size of your portfolio, think about buying a laptop.

 

[bullmarket]

no problem tech/a

I personally don't consider the tax consequences when selling. After all, if you make a nett profit at the end of the year you will end up paying some tax and if at the time of selling you suspect you might not have sufficient cash on hand from wherever to pay any tax liabilities when they become due then you can always take out the approximate tax from the realised capital gains and set them aside before reinvesting the remainder...........each to their own on how you handle tax issues.

By closing out holdings early for whetever reason at a profit and then paying tax, all you are doing is paying tax in advance, and not additional tax, if you then re-enter at a higher price and the share price continues to rise.

eg......if you buy shares a 100c and close out at say 120c you pay tax on the 20c gain (treating this as a one off and ignoring any other profit/losses).

If you then re-enter at 125c and then sell out at 150c you then pay tax on the 25c gain. Therefore in total you have paid tax in two lots on a 45c gain

But had you not originally closed out 120c and held on until 150c and then sold out you would pay tax on the 50c gain from 100c to 150c.

So by closing out at 120c and then re-entering at 125c and selling at 150c the tax payable at the end is basically the same except that you have paid it in 2 'installments' so to speak.

But as I said in my original post, there is no single right answer to ghotib's scenario. It boils down to the individual's personal circumstances and how well they want to sleep at night it's a matter of each to their own on this one

cheers

bullmarket

 

[tech/a]

By closing out holdings early for whetever reason at a profit and then paying tax, all you are doing is paying tax in advance, and not additional tax, if you then re-enter at a higher price and the share price continues to rise.

Hope you have a good accountant and you may learn something.
CGT for holdings under 12 mths for me is approx 50%
holdings 12 mths or more 25%,perhaps you prefer to pay maximum tax.

Bulldust you have a great deal of opinion on trading for a self confessed investor.Your wealth of experience shows.

You maybe suprised at the level of competence of many who watch let alone contribute.Not all are pimply faced school kids collecting paper money!

Like the Laptop idea but I some places hard to get a plug in.

 

[bullmarket]

Hi tech/a

Yes we have a highly qualified and experienced tax accountant who has been doing our tax returns for quite a few years now and we trust him implicitly

I am aware of the 50% rule for holdings of more than 12 months.

As I said earlier, there is no single right answer to ghotib's scenario and I gave my reasons why and how one handles his/her tax situation is entirely up to them according to their personal circumstances, trading/investing strategies and objectives.

Good luck in your endeavours.

bullmarket

 

[It's Snake Pliskin]

Hi tech/a

Yes we have a highly qualified and experienced tax accountant who has been doing our tax returns for quite a few years now and we trust him implicitly

I am aware of the 50% rule for holdings of more than 12 months.

As I said earlier, there is no single right answer to ghotib's scenario and I gave my reasons why and how one handles his/her tax situation is entirely up to them according to their personal circumstances, trading/investing strategies and objectives.

Good luck in your endeavours.

bullmarket

Hi Bullmarket,

Could you please stop saying "good luck in your endeavours". It is annoying. Just end your posts so no one has the impression that they can`t contribute.

By saying good luck in your endeavours is llike saying farewell and enjoy your long trip or something. We are not writing letters here.

Keep poisting away though.
Snake

 

[bullmarket]

No problem Snake

But you will see my post was adressed to tech/a and so I don't see why anyone else or even tech/a should take offence.

If tech/a (or anyone for that matter) endeavours to resort to childish, immature name calling like tech/a did earlier to try to upset, provoke or whatever me, all of which is simply water off a duck's back to me, then I don't see any problem in my wishing them good luck in their endeavours, especially since I don't see any value to me in engaging in childish name calling.

I'll just continue to call things as I see them

cheers

bullmarket

 

[wayneL]

OK Back to Stop Losses vs Closing Out folks

Cheers

 

[tech/a]

I'll just continue to call things as I see them

Another annoying sign off.

Everyone calls things as they see them.
Bulldust no body minds constructive input,your input is both generalised and the majority of comment is not experience based.

What annoys me is you treat everyone like a novice and answer questions like your an old hand when by self admission you dont trade.

You have a nice day.

 

[wayneL]

Time for a stop loss.