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September 30th, 2005 by eyal | Filed under Trading Plan, Trading Resources. |
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Stops and more stops, this is my focus these days. My entry rules are pretty well defined, the end result of profit or loss depends largely on exists.
The following article from HRE covers Q&A on all sorts of stops: percentage, fixed dollar, time based, gaps, stops gunning, trailing etc.
Some favourite points:
The trends are more obvious if your holding period is weeks or longer. But longer holds have a disadvantage when it comes to stop placement. You have to take on greater risk with longer-term positions, because stocks will wiggle around a lot more before getting from point A to point B.
There’s one more caution in regard to stop placement. Your stops have to match your trading strategy. For example, if you’re looking for a 3-point swing, you have to stay out of the market until your risk (current price to stop price) is a point or less. This goes back to the importance of picking good entry points.
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.I never use percentage or dollar stop losses, at least for the initial placement. The first stop loss is always based on the price pattern and where current action violates the trade setup. Of course, you need good trailing stops once a position moves in your favor, and flat dollar strategies have a useful purpose in protecting profits. But I would avoid percentage stop losses in all cases.
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.There is a definable risk based on the pattern and where you enter the trade. Each trade has a different risk profile, and your trade entry tells you how much it can wiggle but still get you to the goal. You need to include this standard deviation in your stop-loss planning, or you’ll take maximum loss after maximum loss.
From HRE on stops.
I always thought it was interesting how IBD always instructs investors to sell any stock that falls 7-8% below the buy point. I think every stock is different and warrants a stop that makes sense based on its chart. For some that might be 5% and others 12%.
bumby
I reckon for the majority of investors just having some sort of stop loss in place and adhering to it is already a vast improvement.
I don’t like percentage stops at all, as much as possible I try to use support/resistance, trendlines and chart patterns for stops. There are usually AREAS which if the stocks reaches then the original premise behind the trade gets invalidated, sometimes :)