Simple sell rules to protect against disaster in financial markets

I'm going to share some simple sell rules to protect myself against disasters in financial markets. I would like to hear the feedback of the other experts here. If you're fine with sharing some of your own simple guidelines regarding selling for risk management, I would like to hear them.

The purpose of these sell rules is to protect against disastrous losses, not maximize profits.

1. When the price closes below the 50-day moving average initially, re-examine reasons for buying. If the reasons are still as strong as when you bought the stock, you may want to continue to hold. If the price continues to fall further when it is already below the 50-day moving average, sell the position partially even if the reasons are still strong.
   
   I don't argue with Mr Market. Years of experience being slapped by Mr Market has instilled in me a strong respect for Mr Market.
   
   If the price continues to fall further even after the position has been sold partially, consider selling more until it reaches your emotional comfort level. If you are emotionally comfortable with the falling price, hold. No right or wrong here. What is important is to reduce some risk exposure when losses mount.
   
2. When the price close below the 200-day moving average initially, sell the position partially. Don't argue with Mr Market. Respect Mr Market.
   If the price continues to fall further when it is already below the 200-day moving average, sell the position completely. Respect Mr Market.

It is entirely possible the price may bounce back strongly after selling below the key moving averages. It is also possible that the stock may drop to a disastrous new low if you do not sell. Even a blue-chip stock with impressive growth numbers can disappoint. See what happened to Ali Baba (9988.HK) this year 2021. If you had sold Ali Baba when it first fell below the 200-day moving average, you would have gotten out at around HKD228. Today, Ali Baba closing price is HKD121.20 which is close to 47% below HKD228. Nobody knows which stock will be the next Ali Baba. By following these rules, one can avoid financial disaster.



The honest truth is that these rules work against a trader quite often, especially in a bull market. However, if he follows them all the time, he will be protected against financial disaster. Financial markets are dangerous.

I follow these rules with discipline myself. During the exceptional times when I do not, my position size is small enough such that even when I lose 100% on the position, I will do fine.

 

I think you should be trading like this always , with risk and the law of large numbers in mind.

 

Does this beat buy and hold of index?
If the rule is good and robust you should just short sell every stock that did a moving average crossover to the downside but I doubt it will stand up in a proper backtest

 

This is what happens when you don't use stops.

 

You don't need stops, you just size up/down depending on the strength of the signal.

 

Was that you in the car? LOL.

 

Stops are just a form of risk control. Naive stops are useless

 

Or if you do use them and the stock gaps overnight. Ooops.

For every one of these simplistic hard-and-fast rules, there's a broad range of exceptions that'll empty your wallet specifically because you followed it. If protecting yourself from a crash while still making a good return was this easy, we'd all be following exactly the same set of rules and no one would ever get hurt again. And that's not a simple matter of some kind of "discipline" (which is what most of this kind of threads imply, with an air of superiority: "look at how much more disciplined than all the rest of you I am!")

Most of what's been mentioned is useful - e.g., stops are fine if you're day-trading, being smart about size makes for a useful part (not all, but a part) of your risk-management narrative - and there are other things you can add to the mix (e.g., hedging.) But none of it is trivial, and all of it takes thinking - not just a fixed set of "rules".

 

Should you use stops? Probably, if you're doing very concentrated positions. Will they save your from disaster? Not always, so many things that can go wrong (see above), and they tend to pull down expectancy.

Other ways of tackling the same problem:

Portfolio diversification. If you have <5% of your capital in a single stock you can handle it dropping to zero. If you have hundreds or thousands, even better, though that's the domain of algo traders.

Options may be a better fit - cost money up front but do the job reliably, and you see what risk is priced and if trading with said risk is even profitable. When you hold an option you're independent of the path price takes.

For retail some counterparties offer guaranteed stops (thinking of IG's CFDs, but for good reasons CFDs are not that popular on this board). In Sweden we have leveraged warrants ("minifutures") where max risk is the warrant, unsure to what extent these exist abroad.

 

Exactly. Reality is what this post describes. Rules are helpful, but gaps, news headlines etc throw things off constantly.

It's a big multivariate system. I found the most Valuable rules are all about stops and trade management, position sizing.

Eg for swings I scale in at 2day highs and out at 2day lows.

I look for high-volume Increasing ranges, like F yesterday... great chart 19-21 and daylong 45-degree angle breakout.

Intraday I constantly trade sequences of 200-300 share small lots with .08-.2 trailing and hard stops.

It's all a numbers game. Risk management, re-entries, only adding to winners, timing, being able to trade increasing volatility/ranges etc is what counts.