Greenhouse NAPS: Indivior tanks, stoploss rules, and June review.

Friday, Jun 15 2018 by
9

Well, today sucked.

Indivior, as some predicted, tanked on its rival getting FDA approval. Those who said that I should have done more research on it have every right to gloat, but I stand by my decision. This is portfolio is designed to take the human bit out of trading because I know I’m not good at making those kind of calls. It is the price I pay. That said, I’m quite relieved in my prior post I set up a ‘paper’ stoploss for my paper portfolio of 10% in a day, allowing me to offload this share. 


Of course, being a paper portfolio, there is no market to sell to. For (an attempt) realism and honesty with myself, at the end of the day I reviewed the days trading graph. It opened lower than my stop loss, and fell quickly. In the end, I decided a ‘realistic’ stop loss price might have been around the 400 mark, so ‘sold’ at that. All in all, I lost about 2% on it, but it had been a nice little earner up over 20%. On a generally bad day in the markets generally, diversification kept my total losses today at 1.2%

Learning point: I need to firm up some trailing stop loss rules

Other updates

Royal Mail shares also took a hit after a not so great trading update. It’s one week movement dropped 13%, so was cut. The majority of my holding was still up 20%, but a more recent top up lost 7%.

At the beginning of June I bought into RM at 226p. This was one of my earlier momentum quality focused picks, with quality at 81, value at 68, and momentum at 97.

Picton was sold shortly after as its quality rank dropped below 40, banking me about 7%. Camellia went next (down 6%), along with Ocean Wilsons Holdings (down 4%). These last two have been an experiment on stop losses. Based on a suggestion by a commenter, I’ve been mulling over the idea of graded stop losses, based on risk rating. Provisionally:

  • Conservative stocks – 5% trailing stop. Or drop of 5% over the last week/month
  • Balanced and adventurous – 8% trailing stop, or drop of 8% over the last week/month
  • Speculative – 10% trailing stop, or drop of 10% over the last week/month.

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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8 Posts on this Thread show/hide all

BH1991 17th Jun '18 1 of 8
10

Commiserations to all Indivior (LON:INDV) holders. I was burnt the first time this share dropped like a lead balloon in August 2017. I closed my position with a 32% loss that morning. 


Anyway, interesting point made on stop losses but they could be too tight given your strategy, in my opinion.

Minervini advocates a stop loss between 8% - 10%, but he stresses that you must buy at a low risk entry point, otherwise you will be whipsawed out of positions. 

If your approach is to use stock ranks with random entry points, then it might be worth considering a 15% - 20% stop loss strategy. An academic paper produced by Bergsveinn Snorrason and Garib Yusupov (2009) called Performance of Stop-Loss Rules vs Buy and Hold Strategy compared the performance of both a trailing stop loss strategy and a normal stop loss strategy on companies in the OMX Stockholm 30 Index over a 11 year period between January 1998 and April 2009. Althought 11 years is not the longest test period, it included the 2008/2009 Financial crisis and the 1999/2000 tech bubble.

Investments were made on the first trading day of a quarter (starting January 1998) and at the end of a quarter the proceeds were reinvested. When a stop-loss limit was reached, the stocks were sold and cash was held until the next quarter when it was reinvested. They tested stop-loss levels from 5 to 55%. 

5b26c51ec128aqv_sl_1_1.jpg


The table above shows the results from the trailing stop loss strategy. The cumulative return from a 15% - 20% stop loss strategy significantly outperform the 5%-10% strategy. In fact, 5% trailing stop loss strategy lost money and underperformed a buy and hold strategy. 

However, using a traditional stop loss strategy (i.e. fixed at 5% below the price and not moved up), you would see cumulative outperformance at the 5% - 15% stop loss range (table  below)


5b26c91cc1438qv_sl_3_2.jpg


According to this study, using stops is far better than buy and hold and allows you to lock in gains and cut losers on a systematic basis. However, using a tight trailing stop loss as you suggest might not be the best approach.



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Logic 22nd Jun '18 2 of 8

Pharma is always a bit volatile, and if there is a sudden drop when a competitor gets an FDA license, you cannot be the only person who did not anticipate it (or it should already have been priced in), so people should not gloat too much..

If one cannot find good investments, it is better to sit on cash than make bad investments. Having some spare cash allows you to take advantage to opportunities as they arise. The cost of cash is lack of growth and erosion from inflation, but the latter is relatively mild at the moment.

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jmuggleton 22nd Jun '18 3 of 8
1

Hi BH1991

Thank you for taking the time to post such an insightful feedback. I read the paper with great interest, and while there are obvious caveats to it, this is incredibly helpful. I've managed to find lots of good advice on buying stocks, but little on selling which feels just as, if not more important, particularly given I'm using a momentum strategy which is prone to sudden falls.

On reading the paper, my only hesitation is (from my relatively naive standpoint) it doesn't seem to have anything to factor in the volatility of individual stocks - i.e their risk ratings. Since including them in my studies, I've become used to speculative shares going up and down like a yo-yo whilst conservative shares dropping rings alarm bells. Whether or not I'm should be following those feelings is another matter!

The other issue I need to navigate is the trailing stop used in the study seems to be the highest price reached whilst owned. I can't see a way to get that with Stockopedia, other than 52 week high, which if I'm buying momentum stocks for the medium term will probably be close enough. I've actually been wondering about having something based on how far they are off their high under my ownership in my stop loss rules, but without a clear indicator, I made do with rules for change over a day/week/month/3 months.

I think at the end of the month I'll need to have a review of rules and a clear out based on them. Perhaps a traditional stop loss of 5% for conservative, 10% for balanced and adventurous, and 15% for speculative, and then trailing stop loss/off 52 week high by no more than 10% for conservative, 15% for balanced and adventurous, and 20% for speculative. This certainly feels simpler and more rational than my current set of rules

Looking back at the last 3 big sells due to big falls
Royal mail mid may. Balanced share, so trail would be 15%. Fell 13% over 6 days, recovered a bit, then continued to fall. Would have taken a slightly bigger loss, but not much more than I took

EVRAZ fell mid april. I sold, then bought back in on the recovery. This would have (just) correctly kept me in for the ride

Indivior - this rule would have got me out as my current rule did

Anyway, enough rambling. This has been great food for thought, thank you for a really interesting article, and I'll be looking to incorporate these findings into my rule review

Cheers!

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jmuggleton 22nd Jun '18 4 of 8

In reply to post #377324

Cheers Logic - always good to be reminded that cash is ok, and that it gives me the liquidity to respond more easily to market events. I was surprised how my mind jumped to 'cash is bad' on the day.

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Howard Adams 22nd Jun '18 5 of 8

Hi

Interesting post.

If you are interested to look further towards associating a stocks volatility with share price momentum and then adopting a stop loss trading stance. A site that deals explicitly with those metrics - signalling when any stock is moving into a buy zone in relation to its volatility. As well as signalling when a stock moves from a buy/hold zone down to a warning zone and then a stop out zone. Is a site called TradeStops.com https://tradestops.com/.

I use it as an additional tool set to Stockopedia to help me assess buy, add, slice or exit decisions. It works on a subscription basis and offers support for you to asses the volatility risk of portfolios.

Regards
Howard

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Howard Adams 22nd Jun '18 6 of 8
2

Hi

FWIW I use a couple of tests to help to de-risk my quality & momentum investing strategy. I'm sure these will not be news to many on this site, but some might find them useful.

I am influenced by Mark Minervini's trading approach. Thus momentum is central to my action, but it is secondary to risk-management.

Of the many lessons I have learned by practicing Minervini's approach, I have found that two metrics really seem to help me focus on risk management.

Quite red flags go up for me if a current holding's price versus '50 day MA' (%50d MA) drops below +5% whilst its '% vs. 52w High' shows as being more negative than -7% (or -5% if you are being more cautious).

This test relates specifically to momentum based strategies. I also would not enter a stock if it failed this combined test. Clearly, this is not my only de-risking house keeping, but I find it very useful to way to scan my portfolios with, and it is particularly useful to get me out rapidly or stop me getting into a stock if underlying momentum is in fact not strong enough.

Regards
Howard

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jmuggleton 23rd Jun '18 7 of 8

In reply to post #377444

Hi Howard

Thanks for taking the time to write. I'll take a look at Tradestops and it's reviews and see what I think. I'll admit I'm somewhat reluctant to add another subscription until I've worked out that quality momentum is, at least for now, the strategy which fits my style of trading and works best in the market, but it is definitely something I'll look into and might be worth the money.

I've heard the name Mark Minervini and it sounds like it might be worth adding him to my reading list. The two metrics you bring up sound interesting. I've never really had any facts and figures for a specific metric combination before. I've had a quick look and 10 holdings currently are below +5% 50d MA, and of those 5 are also -7% off their 52 week high, namely:

Berkeley group (M rank 85)
Anglo American (M 92)
Forterra (M 82)
Amino tech (65)
MHP SE (60)

The latter two were under my old system and not bought as momentum stocks though

Expanding to the -5% off 50d MA:

City of London Investment (74)
RM (93)

I'll keep and eye on these and see what happens!

Cheers again Howard. You've given me lots to think about

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Howard Adams 23rd Jun '18 8 of 8

HI I did a reply post to your post #7 but it disappeared.

But it linked through your reply link !!! here it is again (apologise if it get repeated in your inbox)

Hi

Glad the posts offered some ideas.

FWIW to help me to watch my portfolio I have configured my Momentum screen as follows. This has helped me often to see risks or opportunities in the momentums of my holdings. Also, as my configuration automatically flows through into the screening screens and any sector/industry screens it helps me to see the momentum of any stock over the important time horizons. Simply toggling along each time point highlights positive versus negative price movements and their patterns alongside the 50MA £ 52wk High as well as a couple of others.

5b2e47aab80e7My_Momentum_screen.JPG




In the example Hilton Food (LON:HFG) is hitting its 52Wk High, 50MA is >+5% and all 6 time periods are positive. That's very encouraging. It's also positive relative to sector and a strong 200 dy MA (needless to say I hold).



Regards

Howard

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