Stop Loss. Who uses them?

[modhatter]

I am curious how many of you execute stop loses on your stocks or fund trades. If so, under what circumstances do you use them? Is it only when a stock has had a good run and you think it may have reached it's peak, or do some of you do it on a more broader bases.

I understand in cases of extreeme market trading (a significant crash) they are not very dependable. Have you had any experience along these lines?

 

[2B]

I used to when I invested in individual stocks but I stopped when I realized my "stop loss" usually executed at the low for the day .

 

[mathjak107]

i do when i trade my commoditie funds.

 

[Nords]

I am curious how many of you execute stop loses on your stocks or fund trades.  If so, under what circumstances do you use them?  Is it only when a stock has had a good run and you think it may have reached it's peak, or do some of you do it on a more broader bases.
I understand in cases of extreeme market trading (a significant crash) they are not very dependable.  Have you had any experience along these lines?

Brewer and I have had an ongoing dialogue about stop losses over the last year, and he's gradually converting me from a former stop-loss zealot to a disillusioned cynic who may not use them any more.

I'll use a stop loss on a highly liquid stock (large daily volume) that may have unexpected downside. I currently carry stop loss orders on Eagle Bulk Shipping and Intel. However EGLE has had a nice runup so I'll leave the stop loss extremely loose (to protect principal) and I'm trying to do the same with Intel.

I had a stop loss on Superior Industrial but as the stock approached the trigger it was pointed out to me that value mutual funds have been buying a lot of SUP. So I killed the stop loss, bought more shares, and promptly lost a few more bucks. I may buy even more but we'll see how things go over the next year or two.

I suspect that stop losses can be flushed out by experienced market makers, never mind the opportunity for corruption. I'd never use one for a thinly-traded stock (like Berkshire Hathaway) and my timing has been terrible with ETFs. I might consider reverting to stop loss orders on ETFs during a big bear (assuming I see it coming) to preserve principle, but these days I'm reinvesting dividends anyway and would welcome a chance to buy cheaper shares.

Another reason for fewer stop losses is that spouse & I are generally moving out of individual stocks and into ETF index investing. But that's a whole 'nother thread.

 

[brewer12345]

As Nords indicated, I don't believe in them. If you believe in your investment thesis, then who cares about a little interim volatility? If you think you might want to sell and take profits, then it is better to think it through and come to a conscious decision. In any case, you should be selling on the up days, not the down days.

 

[mathjak107]

I dont use them on my regular stock purchases but i do use them on my commodity fund speculations like uso,gld,gsg,dbc.

Commodities are not about time in the market they are about timing the markets. If the markets are rising i usually move my stop losss every day to within 6-7 % of the opening price. IF they take a slide i get sold out and have a little less profit but i go peacefully.

 

[AltaRed]

I don't use them because when I buy a stock, I have an overall game plan and would want to pull the trigger when I want to. There is some residual risk I could be caught in a market meltdown when I am not around to execute, but then I am in it to sell on a high...per brewer's comments.

 

[poyet]

Investing does not require stops.
Handling some stocks does not (necessarily) either.
A trading portfolio, using leverage, cannot be managed without.
A trading portfolio should not be more than 10% of your assets.
A short introduction on how I use stops (better say the system I designed) is given @ http://tradingautomation.blogspot.com/

PS: I concur to most of what has been said before. Stops on thinly traded stocks are triggered by market makers (@ the worst moment for you and best for them, playing the daily vol). Illiquid stocks (given the size of your position) should be avoided anyway. And on the opposite, very large positions for large trading accounts are "manually" monitored..., stop violation is reported by a system and position is VWAPed (Volume Weighted Average Price) by your operator... But this does not affect much the individual trader with a small trading account.

My strategy requires that all stops be "active" on the market with my broker (to have a control on the overall risk given the exposure and therefore a control to avoid margin calls on leveraged accounts), but funny enough it has happened to me that the low be made below the stop (LONG) and that the stop would not be executed, not often but it did happen 2 or 3 times. The broker never provided a satisfactory explaination for that (and refunded the difference). It never happened to me being SHORT (stop limiting upside risk) again no explaination ?

Finally I have made extensive simulations with stops. For example to quote one: instead of having the stop on the market and being executed, having the system reporting @ COB that the stop would have been trigerred that day and instead closing the position at market open the following day. For that specific example, it did not change anything to the global picture. and global returns over the runs.

But globally, stops are dependable. Each of my running accounts has had thousands of stops orders (as they slowly move everyday) and they are 99,9% of the time triggerred according to what you decided. People often have the feeling that they were stopped at the worst moment. There are two factors there: either they do not know how to trade (and they wrongly place the stops) or most of the time if the stop was properly placed it is mainly psychological as backtesting demonstrate where to place stops so that the volat would not concur to "create" the loss.

Well, that's a long and interesting discussion, these were my two cents for today.

 

[Delawaredave]

I don't see how a hard/mindless stop loss rule can be helpful.

However, I think the Investor's Business Daily folks recommend 7 or 8% stop loss decisions fairly universally.

I don't subscribe to their technical approach.  My neighbor does - He's generating a lot of trading activity - but I'm not sure he's making more money from it (he still lives in my neighborhood - so he's no Buffett....).

I think it makes him feel "wanted" by his portfolio.  Everyone needs to feel wanted, so I guess this is OK...

 

[poyet]

97% of the stops are never executed. They are there to keep the portfolio under control. Therefore a wise stop policy should not generate a lot of trading activity. In any case not more than what the strategy used entails. Of course you accumulate orders (numbers) by slowly moving stops, but 3% of the orders end by being finally executed. 97% end by being replaced by a new stop.

Furthermore, a good stop policy is all but hard and mindless. It depends on a lot of considerations and a fixed amount as 7 or 8% independantly of the volatility of each stock has little chance of working well...

I guess that one was a stop executed on a penny stock on a small account, of course it's always funny to think that #3199 orders had been placed on that account so far....

05/15/06 Sold -5626 of IIP @ $1.38 (Order #3199) 7,753.65

but IIP has disappeared since and we're back to a discussion we had with Nords about the "a posteriori" shrinking of benchmarkable trading universes....

Cheers.

 

[FinanceDude]

As Nords indicated, I don't believe in them.  If you believe in your investment thesis, then who cares about a little interim volatility?  If you think you  might want to sell and take profits, then it is better to think it through and come to a conscious decision.  In any case, you should be selling on the up days, not the down days.

I respect your philosophy.......... I haven't used any since the volatile period of early 2000 to 2001. Quite honestly, I saved my clients a TON of money in those "weird days" stopping out of certain volatile issues..........

In more normal market cycles, I have not used them at all............just adhere to a sell discipline..................