On being stopped out

19th Mar '17 by AnonymousUser252054

29 comments 7768 reads

I'm stewing over being stopped out a couple of times recently and hope you don't mind if I vent a little on here. I don't feel I've quite grasped the what/why and how of it yet and would welcome comments.

The latest occasion was losing my holding in Patisserie Holdings (LON:CAKE) last week on the cheap. I don't get to watch prices when I'm at work so it was only when I got home and was cursorily checking prices that I eventually noticed I no longer had a holding, despite the price having risen slightly. What! A look at the chart and also the buys and sells and I could see the sharp downwards spike that had snaffled my shares (just hitting my sell price by about a penny). The mark-down had lasted all of three minutes and during that time had taken a whole bunch of small investors out (there were no buys showing) before the price shot back up and resumed at its previous level pretty much exactly where it had been just before.

I felt I'd been mugged. I'm not entirely sure who by - the market makers, perhaps? And if so, is it even legal for them to manipulate the market in that way? It's a disorderly market! Not that I expect the FCA to be interested if it was.

I'm wary now and wondering if there is any point in using a stop loss. The non-guaranteed ones don't offer much protection against a sharp spike anyway. Can market-makers see where people have their stops and aim for them? Or am I being overly paranoid?

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Ramridge

20th Mar '17

I am not sure if this has been mentioned, if so, apologies.
Automatic stop losses for illiquid shares is a really bad idea. Last year one of my shares hit the stop loss and when the broker went to sell, it could only get a price way below the price I had set, because of the stock being illiquid. As he explained to be afterwards, once the stop loss is triggered then they are duty bound to sell and sell at any price.
Needless to say, I no longer use automatic stop losses.

Rusty2

Or else they come back and say there is no market so failed to complete sell order, happened to me on STM (LON:STM).
If there is a market crash then it's mayhem, you don't know what's going on, you can't cancel it, you don't when, if or at what price they will sell at.

Nick Ray

If you were stopped out last Wednesday afternoon around 16:08 then in that particular case it was a single large automatic trade which caused the drop from 310 to 300. It is possible he only intended to scoop up all the bids at 310 but a largish "O" trade just before him took some of the 310 bids just before his trade was filled and he overflowed. That triggered some stops and by the time everything settled the price had skipped down to 300 due to the thinness of the order book for a stock like Patisserie Holdings (LON:CAKE) .

AnonymousUser252054

Thanks for that, Nick, and everyone for their comments.

Yes it was at 16.08. I looked through the trades that evening and over the few minutes the price plunged I didn't see any substantial quantity changing hands. I thought it was all just a bunch of small sells, which I assumed were small PIs like me getting picked off before normal service was resumed. I can't remember seeing that large trade, just amounts which were varied but comparatively small.

In reply to other comments and good advice; I did set my stop just below a round figure (just under 300p), a level that was tight but had not been touched for several weeks and wasn't likely to be breached on the opening wider spread.

Disco Ball

I don't understand. You set a sell order in the market and get annoyed when the order is triggered?!

Thanks for your insight, Dan : D

21st Mar '17

The spike factor at work today, EKF and IQE, one down for a few minutes and one up.

peterg

The "spike" down in EKF at 14.42 is a large trade - the largest of the day which is a correction. It's probably a sale from earlier on (or even the day before) being corrected. This sort of thing is not uncommon, big trades get reported late or corrected or both and look out of place until you look at the trade listings. It is not evidence of anything unusual, or any malign "mm" influence. Just what happens quite often when big trades get executed in relatively illiquid stocks.

Peter

Thanks for that, Peter. I did see that trade. Any idea why other big trades (not quite as big) on the day didn't cause such an extreme price event? It's the spike nature that strikes me as odd. I've backed off my stops on EKF so far now I might as well not have them!

22nd Mar '17

Shine - see my recent response in the other thread you posted to. Whether a late reported trade looks like a spike when it's reported depends on what has happened to the sp since the trade actually occurred. If there has been little change then a late trade doesn't look out of place. If the trade took place, say, in the early morning and the SP rose over the day and the trade was reported in the afternoon it would appear to have taken place at way below the spread - even though it didn't at the time it actually happened.

I guess these delayed trades are the ones that have the potential to stop out small investors (and conversely take out their limits). They seem to be like tidal waves that can hit the share price. Thanks, Peter.

whitmad

"I've backed off my stops on EKF so far now I might as well not have them!" - this is precisely the problem I have with stops - either they have to be too close, and cost you, or so far away as to be pointless. Looking at price history of my own holdings, I could find no stop level that was worth setting that would not have stopped me out on a short-lived drop. Not worth the bother.

A delayed trade can't stop you out. It's already happened some time in the past.

Thanks for clarifying that point, Nick.

2nd Apr '17

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Shawbrook 31.03.17

Benson212

3rd Apr '17

Hi Shine66,

I apply a 10% stop loss on most trades and found myself in a few situations where I've been stopped out. In my opinion, stop losses are critical risk management tools. It can be incredibly frustrating when you're stopped out unnecessarily, but they key is to have discipline and apply stop losses because when the inevitable bear market/profit warning comes, you will be prepared!

Below is a link to a website, summarising academic research into stop-losses. Take from it what you will, but it certainly highlights the benefits.

http://www.quant-investing.com/blogs/general/2015/02/16/truths-about-stop-losses-that-nobody-wants-to-believe

Furthermore, tight stop losses in stocks which have poor momentum (Minervini would call these stage 1 stocks) are usually bad ideas. Stocks with sideways or downward momentum need a wider stop loss range, in my opinion.

The problem with that is it's the US market which is somewhat different from the UK one. Also they say a 15-20% avoids markets crashes completely, that is not true, if market falls 20% then many of your shares will be sold, if they can be. Take Brexit the market crashed, many stop losses were triggered then market bounced back. The other thing is they are probably assuming that all the stop losses will work, if there is a bad fall such as £ITG, I doubt you will have got the price at -15-20% more like -50%. Stop losses in a market crash are a nightmare. I stopped using auto stop losses on most of mine after being stopped out of some good shares such as Ab Dynamics (LON:ABDP), IG Design (LON:IGR) and various others, on IGR I lost over 100%.

Brackendale

Similar to BH1991 above. It is frustrating to get stopped out now and again, but I think stop losses save me from far more damage over the long haul compared to what they cost me. I view the odd mishap as a kind of tax for the luxury of safer investing.

GrindertraderUK

shine66

There are many resident posters on the Stockopedia forums that will always tell you 'The problem with stop losses is...' and then continue to give examples of individual shares where they have not worked, or have been spiked out.

It is best though to examine the useful ness of stop losses in a 'whole portfolio' point of view and to get away from the simplistic 'I got stopped out on this stock and it spiked up again'.

I have used them successfully for years and will place a stop loss in every single one of my investments and trades.... every single one.

They are a peace of mind tool, and especially important when first entering the trade/investment. They are used to combat over confidence too. Let's say for instance you have done your research and enter into an investment, however you get stopped out. This period can give you time to look into the stock, re-examine all your research, and to take a moment to to think if the fall of the share price was from general market movements or maybe something negative that you have not spotted has surfaced. If after all this you find that the stock is still a good investment at a decent price then guess what... buy back in!

You will also in time notice that while trading costs can be a little higher, your portfolio isn't a list of red, negative % paper losses. You may have one to two at -8%, -11%, but the strategy results in most of your portfolio being blue and healthy, positive, gains. You WILL feel good. Nothing worse that staring at minus 40% 50% losses every day on individual stocks on your portfolio, sadly hoping that one day the price will recover!

Sure at time I get stopped out on spikes and the stock price rapidly recovers, but what is the point on dwelling over that price action! I have seem MUCH more stocks that have stopped me out continue to fall and I just move on... no emotional attachment.

What I tend to do though is that once the stock gains +20% or 30% I just move my stop to break even. After that if the share price continues to rise +30%, 40% 50%... 100%, 200% my stop loss stays at break even and I allow the share price to breath more.. I am still not emotionally attached to the stock, however I have gained confidence without the risk of over confidence. As the months and years go by I know more about the stock, how the share price reacts during news period and can allow the dips to happen.

If it goes into momentum but expensive territory, then on this occasion I may keep rising the stop loss, or simply top slice on the profits.

Stop loss placement is very important and far far more important is at least having a stop loss in place, even if it's too tight! You can always buy back in, and of course your experience of how and where to place stop losses will expand.

You'll notice I didn't give any individual share examples here... because overall it works 'in general' 'on average' 'most of the time' 'as a whole portfolio point of view'... if you get what I mean.

I recommend BH1991 post and for those who have not read it yet.. Robbie Burns, The Naked Trader book, explains not only how and where to place stop losses... but also the equally important 'psychological & positive effect'

best wishes
Ian

Hi herbie47,

I'm sorry to hear you lost money with IGR and I hope you've managed to recover your losses through other trades.

Don't get me wrong, I'm not naïve to the fact that stop losses can sometimes cause more pain than benefit, but I still believe a stop loss can help manage downside risk.

For example, I take your point re Brexit and I would have been stopped out, probably at 20%. However, at the time the market was in complete panic and nobody knew which way the market would go. I would rather take a 20% loss than speculate a market rally in its aftermath and lose a further 20%.

In this scenario I was wrong - the market rallied. However in the Financial Crisis, I would have been correct... its all swings and roundabouts.

I certainly value your point that it doesn't work all the time and I think its good to weigh up the pros and cons :)

Kind Regards,

On being stopped out

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AnonymousUser252054

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