Stop losses ...ASX

[ollie]

1/ How do stop losses work

1/ How do trailing stop losses work

3/ How much is the fee for using stop losses

4/ Direct Broking does not offer stop losses on the ASX, who does ( in NZ ) and/or who do you recommend

Thanks for any help in this area, and sorry if the question has been asked before, i couldnt find it if it has.

cheers.

[shasta]

1/ How do stop losses work

1/ How do trailing stop losses work

3/ How much is the fee for using stop losses

4/ Direct Broking does not offer stop losses on the ASX, who does ( in NZ ) and/or who do you recommend

Thanks for any help in this area, and sorry if the question has been asked before, i couldnt find it if it has.

cheers.

1. Say you bought shares @ $1.00 each, & set your stop loss @ $0.90

If the market price is trading say at 95c, your order won't appear in the sell depth, but should it drop off to 90c, your order is triggered & your broker sells your shares at your preset target price (being 90c)

2. A trailing stop is different

Let's say your initial purchase @ $1.00, & the SP has gone up to $1.20, a very simple trailing stop (using say 10% as illustrated above), might mean you reset your stop at $1.08.

You should never lower a trailing stop but as the SP increases you should increase your trailing stop.

This helps lock in some profits & protects your capital.

3. Stop losses shouldn't cost you any more than the normal brokerage

4. ASB Sec has stop losses etc as part of there DIY online service

ASB Sec should really be paying me for all the promotion i do for them!

Disc: I have nothing to do with ASB/ASB Sec other than i use them both

[ollie]

Thanks very much shasta,

so if your trailing stop loss is set at 10% below the s/p, say $1 and your s/p goes to $1.20 or higher ( hopefully ), does you trailing stop loss automatically follow the s/p up keeping that 10% saftey net or do you need to manually reset it up in line with the increase in s/p.. ?? I think your answer tells me ,yes. so i guess thats means i can't see the difference between the 2 styles of stop losses.

Maybe what i'm asking is, is the stop loss set at a percentage or a price. I had thought it might be a percentage, then you could more or less ignor it as if the s/p continued to rise so your 10% saftey net would follow it up automatically.

Hope that makes sense to you.

[shasta]

Thanks very much shasta,

so if your trailing stop loss is set at 10% below the s/p, say $1 and your s/p goes to $1.20 or higher ( hopefully ), does you trailing stop loss automatically follow the s/p up keeping that 10% saftey net or do you need to manually reset it up in line with the increase in s/p.. ?? I think your answer tells me ,yes. so i guess thats means i can't see the difference between the 2 styles of stop losses.

Maybe what i'm asking is, is the stop loss set at a percentage or a price. I had thought it might be a percentage, then you could more or less ignor it as if the s/p continued to rise so your 10% saftey net would follow it up automatically.

Hope that makes sense to you.

Yes, you manually have to adjust it

Phaedrus would be better at explaining this bit, but if you choose a stock, you can always backtest it for the short/mid/long term average trailing stop level.

I used 10% purely as an example - some stocks are extremely volatile & can move +/- 20% either way, especially illiquid spec stocks.

Phaedrus, or AA or another TA chartist may be able to help you with back testing stocks

[Phaedrus]

Ollie, there are Stop Losses and there are Trailing Stops. There's no such thing as "Trailing Stop Losses".

Stop Losses provide a means of limiting your losses should a purchased stock drop in price after your buying it. They are set before buying and are never moved. They could perhaps be a fixed percentage or $ amount below your purchase price, but the best place to position them is just below a recent support level.

Trailing Stops are a type of exit strategy. They are based on the latest shareprice and rise as the shareprice rises. Most commonly they are based on a fixed percentage of the highest price, but there are many other ways of setting them. They are never lowered. Their purpose is to lock in a proportion of your profits should a stock you are holding make a significant fall from its highs.

While "fixed percentage" or $ based Trailing Stops can act as a standalone exit strategy, generally speaking they significantly underperform other indicators.

[ollie]

Thanks for you help shasta and Phaedrus,

I am more confident now in approaching this tactic, i will look at ASB sec to see what they offer , pity Direct B don't offer this facility as i'm all set up with them re; bank accounts etc.

cheers

[wbosher]

You can set stops on Direct Broking using the "trigger when" field. However, this is only available on the NZX at the moment.

This does need to be done manually, so if using a trailing stop you need to adjust this as the SP rises.

This is not on by default however, you will need to give DB a call and give them your acc number and they will activate it for you. This will take effect immediately.

[ollie]

Thanks wbosher, yes Direct told me that stops were only available on the NZX. Pity because my total focus at present is in Oz . Iv'e been with Direct since Access crashed , but i guess it's like banks today, no loyalty, just go where's the best service.

[wbosher]

Yeah, I'm on the ASX too. I think DB may be looking into this at some stage, check out - http://www.sharetrader.co.nz/showthr...t=5559&page=16 about half way down.

[contrarianinvestor]

The world's best investors such as Warren Buffett and Peter Lynch never use stop-losses.

It is a money losing strategy. They are intuitively attractive and brokers love it because it creates commissions.

Ken Fisher, founder of Fisher Investments and one of the best investors of all time commented in his book The Only Three Questions That Count that stop-losses is a "popular tactical myth . . . on average they lose money . . . they feel good but are bad". Fisher also made a comment that "the only stop-loss certainty is increased transaction costs" and that "brokers love stop losses and promote them"

Warren Buffett made a comment in his 1987 Berkshire annual report: "The strategy says nothing else matters: A downtick of a given magnitude automatically produces a huge sell order . . . The less these companies are being valued at, says this approach, the more vigorously they should be sold . . Considering that huge sums are controlled by managers following such Alice-in-Wonderland practices, is it any surprise that markets sometimes behave in aberrational fashion?"

Peter Lynch made a comment in his book One up on Wall street: "I've always detested stop orders . . . When you put in a stop, you're admitting that you're going to sell the stock for less than it's worth today"

If you see shares as part-ownership in a business then history tells us to buy shares in good companies when they're cheap. The stop-loss strategy encourages investors to sell when shares are cheap. There are times when selling is wise but that will depend on analysing the business, not its share price.