I was wondering what members' opinions are on setting bottom prices for stop losses. i.e. if the bottom price is set too close to the trigger price and the share price falls dramatically (like CMCX did this week) then the stop loss would not work.
Obviously, the bottom price could be set far away from the trigger price, but this could potentially wipe out much of the gains made if the stop loss does work.
I'm still deciding where to draw the line on this dilemma.
Hi
Personally I'd look at the business sector characteristics and performance rather than having a blanket stop loss.
Ig Group (LON:IGG) has suffered similar drops in the past and recovered. In the same way Cmc Markets (LON:CMCX) remains a quality business, in my opinion (I hold) and I am happy to keep holding it.
Should business performance deteriorate to an extent greater over a longer period I will look at it again.
These sorts of companies can be counter-cyclical and it is important to remember that - they depend on market volatility to make money. Also, I suspect Cmc Markets (LON:CMCX) has had a covid windfall and it is coming back to earth now.
If you are determined to concentrate your portfolio such that a stop loss is necessary perhaps some multiple of average true range is best for you, the multiple based on chart history i.e.a dynamic stop loss rather than a pre-set percentage, but I agree this would not have saved you last week!
Regards
Ben
If I have read your post correctly, I think you're referring to the problem of 'slippage' when the share price falls too rapidly for the stop loss to be activated, so you end up selling for a lower price than the stop loss.
It is impossible to prevent slippage, but one solution is to use a guaranteed stop loss, for which a charge may be applied if the stop loss is activated. Not all brokers offer this service, and often the stop loss has to be 20% away from the current share price.
Slippage frequently occurs after a firm issues results that are worse than expected. Some experienced traders avoid buying stocks just before results are due. Small companies and junk stock are particularly prone to slippage and this should be borne in mind when buying them.
The other strategy is to set stop losses in a way that reflects the volatility of a stock. Stocks with a high beta (high volatility) generally require stops of up to 20% whereas stocks with a low beta may only need stops between 5-10%. Some traders set stop losses at 3 x daily ATR and this is a logical way of achieving the benefits of a stop loss without getting regularly stopped out because the stop loss is too tight.
