Is a stop-loss strategy sound?

Discussion in 'Trading' started by garfangle, Aug 15, 2003.

  1. It seems that more and more traders are encouraged to use stop-loss orders (SLO) in their trades (if long) ostensibly to limit large and sudden losses. It is often used where daily monitoring of the market is not possible and set at such level where the loss would be acceptable. For instance, at 10-15% below either current or bought price.

    However, by instituting such a strategy for a portfolio, it automatically locks in the losses (though may still be at a profit) during volatile markets, even though the price trend is in your favor. Meaning that though a stock still has upward momentum and has the same positive favorability as when you originally bought it, you force a sell during temporary market panics.
    A SLO regiment, which favors minimizing losses over maximizing returns, may in the long run significantly reduce your total, absolute return.

    Great stocks during the past decade like Cisco and Dell, even after accounting for the recent bust have returned many thousands of percent since 1990 (25K and 55K, respectively). During each year and even over several weeks the stocks (and many others) have dipped over 10-15% from their previous highs, only to move higher thereafter.

    A SLO would have sold those stocks very early on during the run, and then you'd have to re-enter the market to buy them again, sometimes at a higher price. I am not saying that one should just be a Foolish Buy-and-Holder (pun intended), but I am arguing against an equally dumb strategy that prevents you from letting your winners run because you are fearful of a losing position.

    Is there better way to decide when to sell, especially if you are not a daily trader?
  2. lindq


    And HUNDREDS of other stocks have lost 99-100% in the same time period. Therein the need for a stop loss system .
  3. the bear market must be a distant memory when guys are back to thinking "just hold on it will come back".
  4. mark1

    mark1 Guest

    IMHO it depends on the way your system is designed.

    If you have a high win rate% , enough trades to bet a small portion of your capital on each one , and a relative short exposure in the market, you can trade without stop loss.
    I mean how long does it take to a stock to dive 30-50%?
    If your trade doesn't work in a reasonable span of time, you get out quickly and move on another trade (bear in mind" high win rate% sys").
    Some systems are much better without stop loss, but you have to be sure you risk a small portion of your capital when the worst case scenario hits your trade.
    There's not a perfect stop loss stategy that works for any sys. No way
  5. lindq


    LOL. Probably the best sign of a bull market! They'll learn.
  6. damir00

    damir00 Guest

    i never use price-based stops. time-based, yes, but not price-based.
  7. opw


    IMO trading without any stoploss whatsoever is a recipe for disaster.

    The stop loss protects you from unforseen events.

    Just that the odds are against a certain event happening does not mean it will not happen.

    Anything can happen. And it will. Ask Niederhoffer...:(
  8. damir00

    damir00 Guest

    i disagree. what saves you from disaster is appropriate position size. all stop losses do is get you premature exits.
  9. opw


    only if the stop is too tight...

    No stop means an indefinite risk for short positions, and a maximum loss of the value of your stock for long positions.

    How do you make money if you size your position so that 2% risk is the value of your stock? If a stock increases 100% you only make 2% of your account.

    In other words, how can you 'size' your position if you do not know what your maximum loss is going to be?

  10. damir00

    damir00 Guest

    you're forgetting timeframe. velocity. for example, 100% on 2% twice a week is...a lot.

    the only way to protect against maximum loss is to keep money out of the market. stops will not protect you from maximum loss: stocks can - and do - open with 98% gaps.

    #10     Aug 15, 2003