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stop loss strategy

Discussion in 'Shares' started by dkmc, 17th Jan, 2006.

  1. dkmc

    dkmc Well-Known Member

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    What rules do people use to set a stop loss???
    What do you find best depending on the situation
    Ive read about using
    2% of total portfolio as a stop loss, set when you buy


    How about trailing stop losses - what time period do you set - ie reset the stop loss every week, every 2weeks etc
     
  2. Tom&Don

    Tom&Don Active Member

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    I think what you are talking about is a fundamental part of designing a SYSTEM.

    There is no one general answer - it depends on the system and your own psychology.

    If you want to know what people use, you can visit any number of forums.

    Either way, make sure you never take anything for granted - test it for yourself, see how it fits in with your own objectives, strengths and weaknesses.

    Also, you may be better looking into 'money management' a-la Van Tharp to get a clearer picture of how to determine your stops (and exits).

    Possibly not exactly the answer you were after.

    Also - I would suggest there is no such thing as a 'trailing stop-loss'. There is an initial stop-loss that protects your equity if the position moves against you, then there is a trailing EXIT that moves from the loss position hopefully into a profit scenario. Maybe you are thinking 'stop-loss' relates to your moving position size and not the initial entry. Thats the way I see it anyway.

    T.
     
  3. eddievanhalen

    eddievanhalen Active Member

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    Also extremely dependent on your capital base. Books that promote cut and dried rules here are kidding themselves IMHO.

    eg) you are trading/investing a kitty of 20k and you intend buying 5 * 4k parcels in different stocks at an abitrary price of 50c. If you were to limit yourself to 2% of equity lost ($400 minus say $100 for transaction costs = $300 you can afford to lose on the trade) then your stop loss has to be at around 46.5c which is pretty tight. In some cases , depending on the technical picture you may be able to place a stop that close but in many cases I believe you need to go higher than 2% with a small capital base to be realistic. That's what I found when I was starting out anyway.

    I trade with a reasonably substantial kitty these days and it's seldom the total position is more than 2% of my total equity so my risk is often in the 0.2% sort of area per trade.

    Horses for courses .

    Ed
     
    Last edited by a moderator: 17th Jan, 2006
  4. Tropo

    Tropo Well-Known Member

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    An answer to your question/s could fill minimum one chapter…
    So ... 2% stop, Trailing Stop-Loss Order ( a way of protecting profits ), Average Daily Range Stop or Count Back Line ( Guppy's invention ), Breakeven Stop..
    It all depends how big is your account, what is your time frame, risk management, which instrument you are willing to trade ect, ect….
    Below is also variety of strategies for placement of stop loss ( for short term players/daytraders )
    - below today’s low
    - below yesterday’s low
    - below secondary intraday support levels
    - below multi-day intraday support levels
    - below 50% retracement of last rally
    - below an index day’s low or intraday support levels
    The best way to go is read a few books on this subject so you’ll be able to choose what kind of stop is suitable for your trading/investing style….
    :cool:
     
  5. dkmc

    dkmc Well-Known Member

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    Thank you all for the replies
    Looks like I need to read more on the topic
    Please list the 3 best books on this subject

    Say with a small portfolio of 50k
    5 shares of 10k
    buy and hold type shares
    but want to sell if the share goes the wrong way, and continues to
    Not really trading,
    but a general stop loss strategy for buy and holders to protect overall portfolio returns from a share that drops 30%
     
  6. Tropo

    Tropo Well-Known Member

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    O.K...... My 20 cents...

    I can only comment on Technical site of trading/investing.
    If you are a beginner the first book I would recommend is "The Art of Trading" (second edition) by Christopher Tate.
    This book contains enough info to give you a broad understanding what trading/investing is all about.
    If you need more info/details go for "Share Trading" by Daryl Guppy, who wrote more books on this subject such as:
    -Trading Tactics
    -Chart Trading, and I think he wrote one or two more.
    http://www.guppytraders.com/gup64.htm
    If you are still "hungry" Alexander Elder's "Trading For A Living' will do the trick.
    Suggestion: Do not try to read few books at the same time, because your brain will evaporate.

    "but a general stop loss strategy for buy and holders to protect overall portfolio returns from a share that drops 30%".
    I hope (hope = 4 letter word) that you mean 3% NOT 30%... BUT if you really mean 30% drop it means you want to be a very long term trader/investor.
    Trading like this is done usually on a weekly basis.
    You may try Alan Hull "Active Investing" http://www.alanhull.com/
    You can find a lot more books on this subject on http://www.moneybags.com.au/

    Happy trading. :)
    :cool:
     
  7. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Hahahaha Tropo, that line really made me laugh!

    Mark

    dkmc,

    Just curious to know re: your selling out of a share that is heading south 'and continues to'.... Just wondering, if you have done significant research on the share and you know the company is healthy and will (almost certainly) recover, but for whatever reason the price is falling (maybe it's fallen out of favour or there was a 'bump in the road' so to speak), would you hold onto it and even see the slide as an opportunity to buy some shares whilst they are undervalued?

    Mark
     
  8. Tropo

    Tropo Well-Known Member

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    ...."(maybe it's fallen out of favour or there was a 'bump in the road' so to speak)"...

    Mark,
    A propos "bump in the road".

    You never know how low price may go and how long it will take to fully recover.

    BHP is a good example of what may happen in the case of "bump in the road".
    In 1973 or 74 some investors put money in the BHP and after 10 years they got their money back.
    Sure....good companies may recover with time - but how long YOU can wait for this?.
    This is not an easy answer to this question, or I should say right or wrong answer.

    On the other hand, what is wrong with taking small loss, and buy the same stock back on the way up?.
    In the meantime your money is not frozen and you have got enough "bullets" to fight another day.

    Telstra is another example. Imagine that you bought it around $7 or $8 per share...?
    How would you feel right now sitting on approx. 50% loss with a very small chance to get your money back in the next 5 or 10 years ?.

    But if you are only interested in a good return/income from dividends, the price should/may not matter to you.
    Something to think about it ...
    :cool:
     
  9. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Tropo,

    Agree with everything you've said there. Note that I am not saying that trading is right or wrong, either. It's really a matter of - again - doing research and understanding and having the knowledge to make informed decisions. Much like property investing, really.

    Mark
     
  10. Tropo

    Tropo Well-Known Member

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    O yes !!. You are right !!!.
    Knowledge + understanding + rest of it = To be OR not to be in this business or any other... :)
     
  11. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Tropo,

    You and think so much alike it's almost scary!

    Mark
     
  12. Tropo

    Tropo Well-Known Member

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    Probably because we have got the same name :D :D :D :D
    Suprise ....Suprise....hahahahahaaaa.
    BE :cool:
     
  13. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Next thing you're gonna tell me you have Ukrainian heritage as well!

    Mark
     
  14. Tropo

    Tropo Well-Known Member

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    No ... No connection whatsoever.
    But...if I am born again we may find some common ground!!!! :D :D
    :cool:
     
  15. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Hahahahhaa yeah maybe - if you're lucky!

    Mark