Stop Losses- Thoughts please

9th Feb '17 by pineapplefritter07

12 comments 7156 reads

Hi, I need some help on where to set stop losses, I have recently been stopped out of Free Agent and Burford when I adjusted my stop at 5% from the 10% originally set, at the beginning of the trade as I wanted to lock in some profits if the stock fell, I did make a profit, but wonder if I should have given a more generous stop throughout the trade and stuck at 10%. It also occurs to me that should I be looking at the average daily trading range for the share when setting the stop loss? and around the dividend date I would presumably have to adjust the stop to allow enough for the fall after the dividend payment. If anyone has a broadly successful approach and can offer some help, I would appreciate your sharing it with me. Thank you

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Pineapplefritter07

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12 comments

Daniel Rudd

9th Feb '17

Take a look into a trailing stop loss. That might be for you.

Every stock & sector is different, a 10% swing from a small cap tech stock is very different to a 10% swing from a large cap utility.

PhilHofGrowYourDough

10th Feb '17

Have a read of this thread ...

http://www.stockopedia.com/content/choosing-where-to-put-a-trailing-stop-loss-to-avoid-being-stopped-out-quotunnecessarilyquot-163051/

iwright7

10th Feb '17

For me anything more than -15% from my buy price triggers a sell and unless the share goes up in 2-3 months since purchase, I have got it wrong and its a sell too. Too small a stop loss % will stop you out and my suggestion is to focus on investing rather than trading.

As an example I also hold Burford Capital (LON:BUR) which today is up 215% from my average buy in price. I top sliced half of the shares a few weeks ago so the remaining 50% are in for free. I don't plan to apply a stop loss to these, nor sell them whilst the momentum is generally strong. Hope this helps. Ian

whitmad

10th Feb '17

Its always going to be a trade-off between the risk of being stopped out unneccessarily, and the risk of a loss from a fall in price. I have experimented with stop-losses for high-momentum stocks, which might be prone to large reversals and have concluded that the real defence lies in divsersification. Accept that there will be losses on particular investments but overall you aer better off without them.

On a general fall followed by an upswing - as after the brexit vote - stop losses serve to crystallise yyour losses and cause you to miss the recovery.

I have more holdings that have dropped more than 20% from purchase price and recovered to be in profit than I have that have stayed down.

Nick Ray

10th Feb '17

Trailing stop somewhere between -45% and -65%.

Top-slice at somewhere between +25% and +50%.

Review and rebalance portfolio every 6-12 months.

Diversify your portfolio.

Oh - and read that thread that PhilH linked. :-)

------------------------------------------------------------------------

Basically, if you are choosing "good" (high-Q) stocks then the trailing stop is only to get you out of total changes of fortune. Falls up to -40% are going to happen to one or two stocks in your portfolio and it is hard to say which will reverse and which will not. There is an argument to be made that any stop is not needed, but somewhere around the -50% mark your original reasons for buying that stock are probably no longer valid and should at least be revisited.

But you do want to top-slice since this "harvests" any volatility working in your favour.

And you want to review and rebalance the portfolio at least once a year. If you try to do it more often than every six months though you will be reacting to volatility as much as underlying trend.

PhilHofGrowYourDough

10th Feb '17

You might also find this thread useful too...

http://www.stockopedia.com/content/the-timing-of-selling-a-stock-167110/?comment=2#2

The Third Man

10th Feb '17

I was given the book Naked Trader by Robbie Burns. If you haven't read the book, I suggest that you do so. One of his big investing themes is to get out fast when share prices drop. As he points out, you can always buy back in again.

Well before reading the book I had worked out for myself that the biggest mistake I had been making with my investments was to hold them too long when the price was falling. It has focussed my mind on using a trailing stop loss.

gus 1065

10th Feb '17

One of the niggling things about stop losses is the Murphy's law conundrum whereby every time I get stopped out (I tend to use quite a wide 20% threshhold), the stock in question always seems to recover. I suspect this is a fallacy but the doubt is always there.

One thing I have done to cure this is set up a shadow portfolio of "stopped" stocks on Stockopedia whereby every time I get stopped out I buy a phantom £1,000 worth of stock to monitor how in aggregate things play out. I've been doing this for about the last six months. To date, of the 16 stocks I've dropped some have gone down, some up and one was the subject of a takeover. All told, the portfolio is net down about £200 which given how much FTSE/AIM indices have rallied in the intervening period sort of vindicates the stop loss approach although perhaps not quite as overwhelmingly as I might have expected.

I will be interested to see how things pan out over time, especially if the wider markets have a wobble.

Best,

Gus.

runthejoules

10th Feb '17

If you'r eplaying with momentum stocks that you watch quite closely you will want quite tight stop losses - if there is a big tree shake before expected good results, you *want* to get stopped out soon - just make sure you have an alert set so you know it's happened and you can watch and buy back in again. Of course, the best stop loss is to sell/topslice when things have run up too hot. I am completely terrible at following this advice by the way and just lost a grand of profit on Velocys by falling in love with the story - the above is what I *should* have done! Always protect your capital.

pineapplefritter07

12th Feb '17

Dear All,

Thank you Gus Wil, Whitmad, Phil H, Run the Joules, the Thirdman, Daniel and Iwright (not in any particular order guys) your comments are extremely helpful. By way of note, part of the conundrum was caused by my reading Robbie's Naked Trader book and attending a couple of his seminars; the book suggests a 10% stop loss and at his seminars he was suggesting 5% and the get out quick philosophy.

I now understand, I was trying to apply a one rule fits every share approach, but that was somewhat misguided. I shall now reformulate my stop losses based on inter alia the share I am buying and on a mix of your helpful suggestions having re read this post several time and then having read the articles referred to in this post. I will also start topslicing when I am into some decent profits.

Happy and profitable trading to you all from the Isle of Man and thanks again.

pineapplefritter07

12th Feb '17

Thanks. Kind Regards Ilsa

mercury61

12th Feb '17

Yes I too would like to add my thanks to all that have so generously contributed in a spirit seldom seen elsewhere!

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Stop Losses- Thoughts please

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Pineapplefritter07

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