Stop Losses. Settings and Use

[tobo]

Trailing stop-losses can be used to both protect from big losses and capture good gains.

Obviously the key is how the stop-loss is set.
If everyone set their trailing stop losses the same way, then critical prices would precipitate an avalanche of sales, but not everyone does it the same way.

Does anyone want to discuss their stop-loss methods?
I do not have a method as yet, but I think I need to develop one.

[Steve]

Trading FX, I set a stop-loss when entering a position that is usually based just outside a recent support/resistance mark depending on whether I am short or long.

Trailing stops are the way to go, but it would be easier if the trading platform could be programmed to automate them...

[Phaedrus]

Be careful not to confuse "Trailing Stops" with "Stop-losses", Tobo. Trailing stops are used to lock in profits while stop-losses are designed to limit the loss you make should a stock drop after you have bought.

The simplest and most common method of setting a trailing stop is to use a fixed percentage. For example if a stock has peaked at 100, a 10% trailing stop would be set at 90. Every time prices rise, the trailing stop is raised accordingly. Trailing stops are never lowered. The actual percentage used needs to be varied according to the volatility of the stock in question and your own attitudes. Set it too low and you will give a lot of your profits back to the market when the uptrend ends. Set it too high and you run the very real risk of getting prematurely flicked out of on-going uptrends. It is possible to use back-testing to ascertain the optimum trailing stop percentage for any particular stock.

Another, slightly better method of setting trailing stops is by basing them on the "Average True Range" of the stock in question. Details here :-
http://www.tradernexus.com/advancedstop/advancedstop.html

While trailing stops might perhaps be regarded by some people as a "stand-alone" trading system, I have never thought of them as such. They are better than nothing, but generally you can expect them to underperform a more comprehensive trend-based system. Take a look at the charts I have posted on ST. Almost invariably it is the Trendline break and OBV signals that trigger first and almost invariably the trailing stop is the very last to signal an exit. I see trailing stops as a sort of backup - something to get you out of a falling stock in the unlikely event of all your other systems failing to signal an exit.

One characteristic of trailing stops is useful if you are the type of person that is quite happy to hold on to stocks that are going sideways in a trading range. Trailing stops usually keep you in such stocks where most any trend indicator will signal an exit.

Here are some of my thoughts on setting stop-losses:- http://www.sharechat.co.nz/archives/2001/06/msg00554.shtml
The method is essentially the same as that mentioned by Steve.

[whiteheron]

I used to think that stop losses were the greatest thing since sliced bread but experience has taught me that this is not always necessarily the case
Dont get me wrong, I am not anti stop loss
I still believe that they have an important role to play but they also have disadvantages and I will endeavour to point out a few of these that I have discovered
I should that I monitor the market quite closely on a daily basis and this has influenced my strategy --- I realise that everyone does not have this luxury so the stop loss probably has more relevance for them
I also consider the stop loss to be valuable for heavily traded stocks where it is difficult for the opportunists to manipulate prices

Where stop losses are particularly tricky is with the more thinly traded stocks where the opportunists can and from time to time do try/succeed in manipulating prices to their own advantage
eg, In 2003 I purchased KZL when it was 90c, setting a stop loss at 82c which I considered reasonable (and it probably was)
Shortly thereafter the share price dropped suddenly and I was stopped out only for the share price to quickly recover and continue strongly up to around $7 plus in late 2006
This experience put me off stop losses
Perhaps I should have re purchased again at little over 90c (hindsight tells me that this would have been the smart thing to do) but I was fairly new to the game at the time and did not feel inclined to re buy at a higher price having wasted two lots of brokerage from being stopped out
I now take a longer term view and do not sell unless there appears to be a compelling reason to do so

A few other comments :
Beware of setting stop losses too close to purchase price --- this so often results in being unnecessarily stopped out
Set stop losses too far below purchase price and you probably wont get out early enough, a major downtrend will have probably formed way before your stop loss is hit

I have not used trailing stops as my broker does not provide them
They may be a good compromise as the stop follows the share price up enabling you to collect the very substantial part of any increase in price

Where you set your stop losses is very much a personal matter
Traders tend to set very tight stops wheras long term investors set rather looser ones

[foodee]

Recently I have had 2 'unexpected experiences' with 'stop-loss'

[1] with NAV which was chucking along nicely when the share price dropped very sharply for no known reason. The share price recovered over the next couple of days without any reason. Reasult was stopped out!
[2] with QGC a similar thing happened but did not affect me as there was no stop loss - not even a trailing stop.

I think there is a trading technique - 'Stop-loss raid' or 'stop-loss gouging', where the sp is forced down followed by a swoop in.

I now check my portfolio more diligently and won't have any preset trigger. My main problem is I am away for extended periods(fishing!)and may not be able to check things.

Phaedrus or others - perhaps there may be a way of spotting this manoever, as even without stop-lose set one still can be tipped out!

cheers

ps: I am not against stop-loss

[whiteheron]

foodee

Yes, this is exactly the point that I was making with my KZL example and I continue to see the same sort of thing from time to time especially with thinly traded stocks

I am sure that organised market manipulation is undertaken to cause a triggering of a whole string of stop losses so that shares can be picked up at bargain prices
Seems like a dirty trick to me but but where there are markets there will be manipulators, sometimes successful and sometimes not

I dont know if ASIC keeps a watch on this practice but would be pleased to know
As small investors I guess there is little or nothing that we can do

Solutions will be welcome

[Mick100]

quote:Originally posted by whiteheron

I am sure that organised market manipulation is undertaken to cause a triggering of a whole string of stop losses so that shares can be picked up at bargain prices
Seems like a dirty trick to me but but where there are markets there will be manipulators, sometimes successful and sometimes not





This kind of thing happens all the time in the commodities markets
The floor traders are the culprits in this instance.
It is a practiced and proven method of driving down prices, temporarily - "run the stops" - works every time.
.

[whiteheron]

Mick

Exactly my conclusions --- but what can we do about it ?
Nothing much I suspect

ASIC have too many big fish to worry about without following up on the minnows
Something we all need to be wary of though