Short term - knowledge library 1.0 (This thread is READ ONLY.... No unauthorised Posts), page-56

Stops – Yes or No? Should you really use them?​

Freehold
Date: 26/12/15
Time: 19:16:11
Post #: 16687883

A few things you may want to consider.

1. A 1-2% stop trigger will get you stopped out mighty fast especially in the Spec end of market... think about smaller positons and much wider stops. Which will give you the same loss if triggered. You may find that if you give the stock room to breathe you may get bigger profitable runs. 10-25% stops may yield a better overall result with smaller positions??

1. By putting your stops into the <Broker’s> system you basically putting a program in control of your trading... Which I guess is fine if you have limited time and no other means. But prices can Gap or volume may evaporate before it can fire and auto-stop programs are not very smart. You may find yourself still holding even with auto-stop in place.

1. Personally I'm not very trusting when if comes to the finance sector. I would not be surprised to find out that some in the industry are able to see all stops on a particular stock before they are triggered... and use that information to their advantage. But again its just my guess and in my opinion only.

Freehold
Date: 27/12/15
Time: 12:05:26
Post #: 16688817

Well a Stop loss in place does not mean necessarily that its in a broker system...Could be written on paper or in your head or in a spreadsheet somewhere. The key is you "must" act 100% of the time . I had a time when I used broker stops but found them pretty unreliable... Then I built my own stop system which was infinitely more sophisticated and worked much better but still occasionally missed an exit. But after many years practice your mental discipline naturally gets to a level that I now do it instinctively and can make decisions on the fly in real time (without tech) as long as I have my avg entry price calculated. But even though I still miss the occasional stop. Solution is to have multiple layers of stop triggers so if one gets missed you go to your secondary ... or a 3rd. I have not had an instance of all three being missed yet.



herbalist
Date: 01/01/16
Time: 01:19:06
Post #: 16711513

There has been much discussion of the use of stops in trading. I have always felt a bit of an outsider as i dont use formal stops but for me every stock has its own expectations and risk tolerance. ( I admit I do monitor my holdings most days). Anyway as i mentioned before i have been was reading this Peter Lynch book "One up on wall street" and note his comments as follow:

"....I've always detested stop orders, those automatic bailouts at a predetermined price, usually 10% below the price at which a stock is purchased. True when you put in a stop order you've limited your losses to 10%, but with the volatility in todays' market, a stock almost always hits the stop. It's uncanny how stop orders seem to guarantee that the stock will drop 10 percent, the shares are sold, and instead of protecting against a loss, the investor has turned losing into a foregone conclusion. You would have lost taco Bell ten times over with stop orders.

Show me a portfolio with 10 percent stops and I'll show you a folio that's destined to lose exactly that amount. When you put in a stop you're admitting that you're going to sell the stock for less than its worth today.

It's equally uncanny how stocks seem to shoot straight up after the stop is hit and the would-be cautious investor has been sold out. There's simply no way to rely on stops as protection on the downside nor on artificial objectives as goals on the upside.If I believed in "sell when its a double", I would never have benefited from a single bag winner and I wouldn't have been given the opportun ty to write a book."

Now obviously he wasnt talking about the sort of stocks that most here are investing in and he was writing in a different macro environment to that which currently prevails but I thought it was an interesting perspective. Especially as it seems to reflect some of the comments made here recently regarding stops being hit. I dont think it is anything suspicious like some have said, merely that it is well known that stops will be set at certain levels from a high and on low volume days i believe that algos deliberately seek them out.


gamefisherman
Date: 02/01/16
Time: 19:11:39
Post #: 16716197

Stops.........I think the following article that was written by Doc Vanstone at the request of Colin Twiggs is a must read for all types of market participants.......Cheers and May 2016 bring you all good health, happiness and wealth

http://www.incrediblecharts.com/trading/stoploss-trading-1.php

Stop-Loss Orders: Help or Hindrance? [Part 1 of 3]
By Dr. Bruce Vanstone

Background Bruce Vanstone is Assistant Professor at Bond University in Australia. He completed his PhD in Computational Finance in 2006 and is a regular presenter and publisher of academic work on stockmarket trading systems. Bruce also consults to Porter Capital Management on the design of mechanical, rules-based trading systems. You can find more information on his research at http://trading.it.bond.edu.au.

Bruce has a controversial view on the effectiveness of stop losses and I have asked him to write a series of articles based on his research.

~ Colin Twiggs
Measuring the impact of Stops

Introduction

Many traders and investors place Stop Loss orders as part of their day-to-day investment activity. Virtually all trading books recommend the use of stops, with many making statements like "Trading without stops is like driving without a seatbelt". The argument for the use of stop-loss rules seems inherently sound, yet there appears to be no real evidence that stops are providing the safety benefits that many traders expect.
With regard to medium to longer term equity trading systems (which appears to cover the majority of investors and traders), it may well be that stops are causing more harm than good!
As traders, we are used to having an initial stop loss on a trade, and congratulating ourselves when the stop saves us money as the trade goes south very quickly. Although a stop-loss rule may save us from damage on specific trades, it seems doubtful whether this beneficial effect actually holds when we measure it at a portfolio level. There are a number of specific reasons why this may be the case, which I will touch on later in this series.
As traders, we shouldn't really focus on the return of each individual trade; rather we should focus on the overall return of our portfolio. A large amount of my empirical testing appears to show a mismatch between stop performance at an individual trade level, and stop performance at a portfolio level.
In this series of articles, I would like to demonstrate the mismatch that stops appear to introduce, and show you a way to be able to test this for yourself. This article is part 1 of a 3-part series. In this article, I will introduce an example system, and demonstrate how to benchmark the system with and without a variety of stops, and statistically analyse the results.
You can then use this same process to benchmark the effect stops are having on your own individual trading system, to determine if you are actually benefiting from using stops.

Click on the link above to take you straight to the original source.....


ryan1986
Date: 02/01/16
Time: 22:55:11
Post #: 16716774

Personally I don't use stops. Well I do have set prices in mind to exit if things look weak, but they are manual. I normally reduce my position though as a re-rate happens so by the time it gets to lofty heights, I have exited quite a lot of the original position, if volume drops off and you are holding a large position you're in trouble!

I think trailing stops are handy in situations where a stock has entered what is clearly overvalued territory but you can see the hype might keep pushing it for a while yet, so a sudden sharp drop, as you mentioned, you're stop is triggered and you get out but with more profit than you might have otherwise.

Some things can catch you out with stops though:

- The price gaps down between session and your stop is never triggered, but you're also not watching the screen...
- Your "sell down to" price you nominate while setting up your stop. If the volume between your stop being triggered and your minimum sell price nominated prior is minimal, you could also be left holding a large portion of your holding. So I guess volume VS your holding size on stop is something else to consider?

I personally like to build a substantial position at basement prices nice and early and await the inevitable re-rate. Then sell chunks on the way up during high volume periods, the final little bit I might set a stop on, but normally not.

I guess it all depends on your investment/trading style, but those are my thoughts


Martin Gifford
Date: 03/01/16
Time: 19:52:17
Post #: 16718865

Stops:

I previously got slaughtered without stops, then started using stops, and made serious progress. Then became a daytrader who rarely does in-depth FA. Mainly focus on story, sentiment, momentum, and market cap. Also, I usually buy retraces, and have gotten really good at nailing bottoms. Practice makes perfect. Be willing trade actively, so that entries and exits have less emotional charge, and you learn the patterns and the stock's trading personality. People are afraid of missing big wins, but there are plenty of fish in the sea (in good market conditions). And you can still buy back on a retrace after a surprising rise. Don't be afraid to pay more. The more detached you can be, the better. It's like going with the flow.

If the price falls below my entry, then the market has proven that the entry point was a mistake. That's an undeniable fact. So I instantly sell, and buy back at a lower price. BTW, my sell might accidentally trigger further falls, but either way, I end up with more shares at a lower price, or I gain time to learn what triggered the fall and might then avoid that stock.

One exception might be if seriously positive news is expected in the next few days. Even then, news normally takes longer than expected or isn't as good as expected or is largely factored in. Nearly always you can buy cheaper than you think.

Another exception would be illiquid stocks with wide spreads. You put in a low bid and take what you're given. If someone gets lower, then good luck to them. Anyway, with such stocks, you should bid again at a lower price after someone sells to you - average down.

Newbies, especially, should use stops. Experienced traders just shake their heads at the flocks of newbies on the HC threads saying they are clinging on to their falling stocks for the long term and who start quoting Buffett and whatnot. Those people would be better off learning the lessons and moving on instead of digging in deeper.


forrestfield
Date: 03/01/16
Time: 20:36:14
Post #: 16718967

Stops - a useful tool if you use it as per your strategy and happy to face the circumstances...

I don't use them with my short or medium holdings... simply, they are normally worth more where they trade at the time... however if I trade day trade or highly liquid stocks or stocks which has gone up 100% plus I will put them in place...

Illiquid stocks I would never use them, too much manipulation... won't even use them with stocks with less volume...


marty386
Date: 03/01/16
Time: 20:48:14
Post #: 16718998

On the topic of stops, I tend to use them only once the price is higher than my buy in. Some stocks in early accumulation periods will dip below my buy in. But once running I set a firm stop a few pips above my average. Mainly to provide a return of all capital of a massive retrace happens. Otherwise I move the stop up higher and sell along the way as well.


TheGladiator
Date: 03/01/16
Time: 20:52:18
Post #: 16719012

I have a similar style FF. The only time I use stops is when a stock has run and I want to protect profits. I will constantly move it up as the stock runs so in essence I never have a SP target in mind. I keep moving up my stop until it gets hit. I give it plenty of breathing room though.

I'll use as an example where it didn't work so well though.

- bought in at 1.4 and once it got into the high 3s I Put in a stop at 2.7 as I don't like 2.8 just in case someone sells 1 share at 2.8. So in essence I wanted to protect 100% profits. As it went past 4.5 I moved the stop to 3.7 and so on until my final stop was at 5.7 which ultimately got hit. The problem here was there was an FA catalyst in 3 days time but I stuck to my approach and as you will know it continued up to 8c after I sold at 5.7. So moral of the story don't be so stubborn on your approach and it's OK to alter it if there is a good enough reason to do it.


Pisces
Date: 04/01/16
Time: 00:08:13
Post #: 16719479

Stops is an interesting discussion point because all of the advice I see handed out to would be traders on HC is that stops are essential . If you're going to be trading lots of stocks which in your own inner honesty you're happy to admit that you really know nothing about then I agree stops are essential .

There's just two points . Firstly for numerous reasons some of which have already been covered on this thread ,they don't always work ,especially in illiquid stocks . Secondly ,as @3500 pointed out ,you could be stopping yourself out of big profits . The stock in which I made the most money out of ,a lot of money ,I would've been stopped out of around 30 times as it zigzagged its way to a very high level.

I think you need to sort out whether you're a well researched patient investor who is confident in backing their own judgement or whether you're just jumping in on what someone else says and/or your own scant research and/or the chart and/or because it's going up ,in which case you're probably best advised to have the insurance of stops . Even many experienced traders religiously apply stops because it's easier than having to grapple with the aforementioned issues and experience also teaches you that once something starts heading south it can do so rather rapidly in the same way as it can escalate going north . But once something gets knocked down it's never that easy getting up again.

So just work out who you are ,what you know ,what your own abilities and temperament can cope with and I'm fairly sure that most people on HC should come to the conclusion that they need some sort of insurance ,generally via stops . You can also apply partial stops if you're married to something .But the conundrum is these days I use the accepted stop level being exceeded as a buy signal in a lot of cases . I think also that people saying their performance has improved out of sight since they started using stops needs to include the performance of the types of stocks they're investing in in the corresponding period . I think the performance of the sorts of stocks discussed on these threads over the last couple of years could distort accurate analysis .

It's a complex issue which is why it's just easier for most people to use them . Maybe none of that makes sense to anybody ,but it's the best way I can find to explain it