Stop Losses - when to use?

[bomz_21]

Hi all, forgive me if this is too beginner for this forum.
I tried reading up about 'stop losses' or conditional trades where you can sell shares if they reach a certain price (falling stop loss). I like this idea to maybe catch your savings should the market drop suddenly and you lose all your capital gains. Though are there any catches? Are there any reasons you wouldn't set these up to slightly below your purchase price?

Thank You

 

[galumay]

Depends a lot whether you are trading or long term investing. I imagine trading they are just about a necessity (others in that field will clarify I am sure), for me as a long term invester they would be counter productive. I dont want to sell out when prices drop, in fact if I am sure of my analysis and understanding of the business I probably want to buy more!

Short term volatility is just noise to me, very different to a trader who is trying to profit from it.

As examples of the catches you ask about, 2 of my biggest multi baggers would have been exited if I had used stop losses

I am sure some of the traders on ASF will give you much more detailed explanations of the pros and cons from their perspective.

 

[pixel]

Hi all, forgive me if this is too beginner for this forum.
I tried reading up about 'stop losses' or conditional trades where you can sell shares if they reach a certain price (falling stop loss). I like this idea to maybe catch your savings should the market drop suddenly and you lose all your capital gains. Though are there any catches? Are there any reasons you wouldn't set these up to slightly below your purchase price?

Thank You

Hello and Welcome, bomz_21

IMHO, the simple answer, especially for a beginner, is
Thou shalt honour thy stop loss and and keep it Holy, lest thy capital disappear in the bottomless pit and be eternally lost.

Take a look at the reasons why you bought a share in a company:
You did your research, found a company that you thought was a reasonable investment at this time and price, and you were prepared to pay, say, $1 a share.
Q: Why did you buy? A: To let your capital grow faster than under the mattress or in a bank account (almost the same interest, these days.)
Roll forward in time, and you're likely to be confronted with either of two scenarios.
1. The share price does rise as expected, and your capital grows in value. Let it ride.
2. The share price stagnates and turns down, and you're becoming poorer by the day.
Will you sit idly and let that happen? Or do you take action to keep your wealth as close to today's (high) level as possible?
Where I sit, the answer is simple: Sell at today's price before tomorrow's price is even less.

So much for the need to "Keep the Stop-Loss Holy".

The only variation is now the "How".
You mentioned a tick below your buy price. In the life of a company's share, what is significant about your buy price? Answer: Nothing! The Market moves a share price this way or that solely depending on market forces that you may be able to observe after they have happened, but where you don't feature. (Exceptions, such as Warren Buffet or James Packer, don't include beginners or small retail traders.)
Therefore, it is an unreasonable approach - IMHO - to take any notice of my buy price when determining when it's time to sell.
see http://rettmer.com.au/TrinityHome/Trinity/Musings.htm#onshareprices

In setting a (trailing) stop level, the only "personal" factor is your risk tolerance, meaning the percentage you're prepared to hand back to the Market before taking back your capital. Do remember that your capital is the total value of your share parcel based on the most recent trade. Again, it does not depend on the price you paid, but solely on the price the last buyer was prepared to pay had you been sitting in the sellers' queue.

In order to determine a sale price, I wrote an algorithm for a "trailing stop". It simply calculates the stop at a level when the share price has dropped by more than an average swing from the most recent High. (The algo is written in Pascal language, which won't help you much in standard charting packages.)
If the software you use has a "Keltner Channel", you might start studying that one, It's based on the same idea, but because of its age misses some of the adaptability and flexibility that a fast computer allowed me to incorporate.

PS for galumay: Every trailing stop algo should always contain the reversal signal. Mine shows buy (up) arrows and sell (down) arrows, and even if I stopped out and then find the uptrend resumes, it will quickly give me the "Buy Back" arrow. See example below:

 

[Gringotts Bank]

For reversion - use a price stop when you can reliably identify a hard profit target, thereby managing your RRR. Otherwise a time stop (n bars) and use fixed position sizing.

For momentum - trendline stop or trailing.

 

[PZ99]

Hi all, forgive me if this is too beginner for this forum.
I tried reading up about 'stop losses' or conditional trades where you can sell shares if they reach a certain price (falling stop loss). I like this idea to maybe catch your savings should the market drop suddenly and you lose all your capital gains. Though are there any catches? Are there any reasons you wouldn't set these up to slightly below your purchase price?

Thank You

There is one catch. You buy something for $1.00 - and it climbs to $1.20
You set your stop loss at $1.10

Next day the stock opens at 0.90c after a bad report but recovers to $1.05
You've lost out because your stop loss trigger acted at 0.90c and you've lost your asset.

Of course if the stock falls further during the day you can back your investment back and have some beer money in the deal

P.S. Never done a stop loss myself so happy to be corrected if that's wrong. Cheers.

 

[mcgrath111]

I don't think stop/losses apply for fundamental holders. For example, if you did your analysis, found that WES was a buy because of X,Y & Z so you paid $40 for it.
The next day it rises to $42 (yipee), the next day it falls back to $40 and the day after that it falls to $30 (Off no news).
You had your stop loss set @$31 and your shares have been sold.
But based off no news, you sold off just because of the price fall.
When you have a company that is now cheaper but has the same prospects.

Stop losses hold very high importance for traders though (most I believe close positions end of the day? To avoid the situation you mentioned - correct me if im wrong)

 

[galumay]

PS for galumay:

As I figured, its really only relevant to traders and Pixel gives a great explanation of how he uses stops. I also suspect they are something more likely to be used by those who believe that charting historical trends has some useful purpose and predictive ability.

I guess the question from here is really in what context the OP was asking the question, trading or investing.

 

[bomz_21]

Thank you everyone.
Some interesting ideas here.

It's almost as if it's not worth putting a stop loss unless you've already gained some capital growth in a stock & can afford to put a stop loss in place to save a dramatic fall.

Thanks!

 

[CanOz]

As I figured, its really only relevant to traders and Pixel gives a great explanation of how he uses stops. I also suspect they are something more likely to be used by those who believe that charting historical trends has some useful purpose and predictive ability.

I guess the question from here is really in what context the OP was asking the question, trading or investing.

I think peter2 has proven he can beat the equity indices and most buy n hope types hands down....with stops. Everyone that is successful manages risk, stops are only one method.

 

[Modest]

Think about it for a second what is a stop... It is a point where you're exiting the market, to exit someone needs to either buy or sell for you to get a fill. So for instance, on a drop you're stopped out of a long, to exit that long someone needs buy. Keep this in your mind.

When I first started trading it was all about setting max loss, 1% of your account - but that's the dumbest **** ever. When you get to _the_ point you realise you're minimum or maximum stop loss DOES NOT MEAN SQUAT because it all depends on context and if you can't read context you'll just bleed 1% of your account a hundred times over.

 

[pixel]

As I figured, its really only relevant to traders and Pixel gives a great explanation of how he uses stops. I also suspect they are something more likely to be used by those who believe that charting historical trends has some useful purpose and predictive ability.

I guess the question from here is really in what context the OP was asking the question, trading or investing.

Two points need to be made here, galumay

1. Charts do not have predictive abilities. Charts show trends, support and resistance. From those, and with a certain degree of experience and ability to recognise patterns, one can assess the odds of a chart moving in this direction or that.

2. Whether I'm investing for a long time frame, or trading swings that are over within days or sometimes minutes, the purpose is invariably to increase my net wealth.
Consider an investor who bought 10,000 TLS for $6 each. How long would that person have to wait for the dividends to cover the difference to today's $3.60? My (and Phil Carret’s) point is this: Regardless how much you paid for TLS, once it fell from $6.50 below $6 and on through $5.50, ... the smart action was to sell and take the cash to buy a share that has a greater chance of moving in the other direction.
example: A year ago, $50,000 would buy you 10,000 WOR. Leave the money tied up in 10,000 TLS, and your 60 Grand are now worth $36,000 plus change from dividends. Convert it into 10,000 WOR, and you're now sitting on $130,000.

It's all too easy to find anecdotal evidence by citing Peter2 or Warren B, who have a knack of picking stocks that never go down. They are the 0.1% exceptions in a pool of Millions of retailers and beginners. It's the latter that have to learn how to admit to themselves "it ain't working as intended" and switch to Plan B. Otherwise they swell the ranks of people who leave the Share Market with a small fortune - after entering it with a big fortune.

 

[Modest]

Two points need to be made here, galumay

1. Charts do not have predictive abilities. Charts show trends, support and resistance. From those, and with a certain degree of experience and ability to recognise patterns, one can assess the odds of a chart moving in this direction or that.

Charts have 99% predictive ability.

For proof just look at my Futures thread, don't mean to brag.

Charts are the key to all of this.

No exel required.

No AmiBroker Required.

I post this post at 11:33PM Perth Time.

Crude OIL (CL Futures) I anticipate reaching 52.00 as overall target

If Charts are useless... Ignore me

20/09/17

 

[Boggo]

Two points need to be made here, galumay

1. Charts do not have predictive abilities. Charts show trends, support and resistance.

To me a trend is predictive.

pre¦dict|ive
[prɪˈdɪktɪv]
ADJECTIVE

1. relating to or having the effect of predicting an event or result:

Charts have 99% predictive ability.

For proof just look at my Futures thread, don't mean to brag.

And my TLS thread pixel. I could bore you with quite a few more where the trend has a predictive expectation.

 

[Triathlete]

Charts have 99% predictive ability.

For proof just look at my Futures thread, don't mean to brag.

Charts are the key to all of this.

No exel required.

No AmiBroker Required.

I post this post at 11:33PM Perth Time.

Crude OIL (CL Futures) I anticipate reaching 52.00 as overall target

If Charts are useless... Ignore me

20/09/17

I have to agree understanding how to read a chart will most definitely put the odds of being successful in your favour....

 

[galumay]

If Charts are useless... Ignore me

Done.

wo points need to be made here, galumay

Ok, its my own fault for bringing the issue of charts up, and with giving an investor's view point. Lets just leave it at there are different approaches to being involved in markets, we have almost no overlap in our world views, strategies and understandings - and I dont think any amount of discussion will change that.

 

[CanOz]

Charts have 99% predictive ability.

For proof just look at my Futures thread, don't mean to brag.

Charts are the key to all of this.

No exel required.

No AmiBroker Required.

I post this post at 11:33PM Perth Time.

Crude OIL (CL Futures) I anticipate reaching 52.00 as overall target

If Charts are useless... Ignore me

20/09/17

Last point on charts....by Peter Brandt

 

[Gringotts Bank]

because it all depends on context and if you can't read context you'll just bleed 1% of your account a hundred times over.

No one ever says what they mean by context. I just have to assume it means political factors, fx and interest rate markets, other correlated markets, cyclones and so on. Because if it meant larger time frames then you'd say 'larger time frames'.

 

[CanOz]

To illustrate why we use stops, here is a strategy that buys volatility in oversold conditions.....Its long only for indices that are by thier nature long biased. Here is the results without stops. 100% Win Rate, equals buying and holdind the index since january 01 2012.

 

[CanOz]

The Problem with buying and holding is the drawdowns. This strategy had an open 85%+ loss to cope with. Not many people could handle that, thier tolerance for risk is more likely around the 20-30% drawdown or less.

 

[CanOz]

No one ever says what they mean by context. I just have to assume it means political factors, fx and interest rate markets, other correlated markets, cyclones and so on. Because if it meant larger time frames then you'd say 'larger time frames'.

It could include larger times frames. Essentially your right, its the themes, how crowded the trade is, all of your factors as well.