Discussion in 'Strategy Development' started by Dar Spring, Oct 15, 2006.

  1. I’m a novice trader & purchased a stock last week that had been very beat-up. Set my stop at 10% below the purchase price.

    The stock dropped 11% then rebounded to what I paid for it within 4 days!

    I was not planning on holding the stock for too long (days or weeks) & was going to up my stop as the stock went up. I have made winning trades before (over a few weeks time frame, gold last year for example, sold at a nice profit).

    All in all I am down a few percent in my armature recent trading hobby.

    Any tips on stop loss orders?

    I understand they are to protect against a major loss, but it seems they can “lock-in” losses also. If I have never heard of a stop loss I would have done very well trading thus far.

    Any comments would be appreciated, this is my first thread & I am really learning a lot through reading the archived posts, thanks….

  2. Stopping losses is the only way I know to protect me from experiencing big catastrophic losses.

    I can give no "tip". My method is simple. I trade as if I am fishing. I place a small bet. The bet is analogous to a piece of bait. Usually I lose the bait. Sometimes I catch the big fish. When trading stocks I usually lose a small bet. Sometimes I hold a big winner. The big winner pays for all the small losses.

    I prefer to hold positions longer than a few days or weeks.
  3. Was there a special reason to choose 10%? It is always best to choose the stop-level non-abitrarily, so choose a logical point, eg. past a recent major resistance level. But, be careful with that too, because often the market tests these levels rather wildly, sometimes pushing through the level in hope of finding... stoploss-orders.

    IMO,stops, whether mental or real, are necessary for reliable, methodical trading. Just as you can only hope to enter a trade just before it takes off in 60% of the case, a hit stoploss, whether mental or real, may in 40% of the cases be wrong, meaning that the stock will do a turn-around after the hit.
    Placing a good stop is as hard as choosing a good entry, if not harder. In fact, I always use stoploss orders to enter my trades. The market is unaware about my position, so opening or closing is actually the same action.

    Also IMO, actual stoploss orders are better than mental ones, because you won't be seduced into 'adjusting' your mental stop. For most traders I know this is the hardest to do, so the need all the help they can get.

  4. Welcome to the world of trading.

    Stop loss orders became in vogue after the tech crash. Just about every other day you would hear the word "stop loss" on CNBC.

    However, the stock market adjusts to an inefficiencies in very short order. It is common for a market maker to take out the stops by dumping a large block. That is so they can accumulate more on the way up.

    So what is the solution...well...we are all still sitting here trying to figure out an acceptable solution.

    Your going to have to study this situation intently. First off, I never saw you discuss the stock you were going to trade. If your just beginning, why not throw up a post asking for thoughts on that particular stock?
  5. lindq


    IMO, mechanical stop losses should only be in place if you are unable to watch the market, or if you simply can't trust yourself to take the loss when your target is hit.

    It is a common experience to place a stop loss in the market and watch it get taken out. You might as well raise a red flag saying "hit me"!

    Remember, too, that market conditions will sometimes cause a stock to move to your stop loss point, when there may be no problem with the stock. So it is often better to use mental stops and think about what conditions are causing the problem before pulling the plug. But when the decision is made to exit, then do it. And don't look back.