Stop Losses.

Stimulated by Snip.

Apologise for being long winded.

I have been thinking about Stop Losses for quite a while trying to find a strategy which will protect my gains as well as protecting me from unreasonable losses.

One of the problems like Snip suggests is triggering stop losses to early or to late and thereby reducing the possible overall profits.

But the important thing I am beginning to believe is protecting ones pot from decimation.

I use Comdirect for my Sipps because of the availability of their stop losses and, hopefully, if, or when I can organise my ISAs and PEPS holdings with Barclays will move them across to Comdirect for my peace of mind. Having suffered some of the pain of the Tech

Assuming I believe in my stock picking ability (Sometimes Questionable) I am thinking trying to modify my stop loss approaches as follows: -

Larger capitalization stocks.
At the time of purchase to initialise an immediate 10% stop loss on the purchase value of the stock. When, or if, the share moves to above to above 5% of purchase value to put in place a trailing stop loss of 2-5% . (Modified by value of holding.)

Hopefully, although the stop loss will be triggered sometimes when I would prefer otherwise, it will protect the gains made and protect me from myself and stop me allowing the price to roll down further before dumping.

Again, if the up going trend returns, I can always repurchase the stock having forfeited 0.5%, the narrow spread, dealing costs and a little pride. (The latter has never fed me.) Revise my opinion of the old one. Or move on to another stock or watch and wait.

Medium capital
Here influenced by often, increased volatility, smaller market size, larger spreads, at time of purchase to initialise an immediate 15% stop loss on the purchase value of the stock. When, or if, the share moves to above to above 10% of purchase value to put in place a trailing stop loss of 10% plus the half the normal high to low spread of the past 3months

Again, I may have to swallow my pride, but if I have a real belief in the stock and can find the cause of the movement I can repurchase the stock a little later, probably at greater cost than that of the same action in a larger capitalized company

Aim and Smaller companies
Here influenced by often, much more volatility, much smaller market size, much larger spreads (sometimes the spreads strike me as ludicrous but not without reason),
At the time of purchase to initialise an immediate 20% stop loss on the purchase value of the stock. When, or if, the share moves to above to above 15% of purchase value to put in place a trailing stop loss of 10% plus the half the normal high to low spread of the current month.

Again, I may have to swallow my pride, but if I have a real belief in the stock and can find the cause of the movement I can repurchase the stock a little later, probably at greater cost than that of the same action in a larger capitalized company

Looking back over the last 5-10 years I think these strategies may have saved me a lot of cash. (However, I may have lost the same total amount but spread smaller losses over more companies.)

I do look at charts, I may even have started to be influenced by them (a little), but would appreciate the thoughts of others on this topic. Especially, the Chartists, if the can illuminate on the indicators they choose to use and the reliability of the indicators, over the period of time they have used them.

Shares tend to trade between "channels" which chartists are very good at identifing. I find it easier to to use the S1, S2, & S3 (Support levels of Pivot points) to indentify the channel a share is trading between. The PP (Pivot Point) is the starting point.

If droppping a share will bounce between the PP and S1. (Rising the PP & R for Risistance point) The S1 is the area where a share will initially get support. If it falls through the S1, it will go down to the S2 where it should again get support and bounce back. The S3 level tends to be the lowest support level and if a share breaks this level and does not bounce back it tends to keep falling.

I used to put my stops at S3 on every share I purchased. But found that many would drop to that level and then bounce back up. Now I have it set it 1.5% below the level and since doing so, every share that has the stop loss kick in - the share if it does bounce back has not done so for long, and in every case has soon after dropped even further. It has worked extremely well.

The first stop is set as soon as a share is purchased. It the S3 goes down I leave it alone. If the S3 goes up, I raise it. It is very good at locking profits, and restricting losses.

Also because the price tend to keep dropping, when I am able to recognise a 123 (or head & shoulders rise) has formed thats when I repurchase the share. I only found out on thursday how to recognise a "dead cat bounce" which is quite different.

As personal view I tend to place 3% stop or as little woman says look at pivots and trailing stops. I do not think there is any one method and for your large caps at a standard 10%, I would not like to place a 10% stop on AZN or GSK. I do tend to be more short term so this suits me. I think there is some info in this weeks share magazine about stops so that might be a good first stop.

Instead of a percentage stop loss.
Why not combine it with your entry strategy?

I assume that you will be buying a share near it's support,
not resistance? Set the stop loss below the support to
stop getting stopped out needlessly by noise.

For take profit stops, follow the price action up. Bring it
up to break even initially then follow the price up. Each
share will 'vibrate' at its own frequency, so it's up to
you how far you trail the price action by. I assume here
that you know your stock and its own peculiarities in its
price action.

Melnibone.

Thank you all. Still thinking.

Interesting article by Alpesh Patel in FT Page m28 Sat May 8th/9th.

LW

Jeez - You'll be reversing soon.

My stop losses are set quite a long way away from the price, so it should not kick in there is a spike in a price. But as price rises so does the stop. Yes it means I'm not maximising profits, but at the same time it also means I don't get caught out by a realy big drop in price. And that can really hurt, especially if I was showing a really big paper profit before!

The thing I find difficult to factor in is the Capital Gains Tax liability. If you have 40%CGT to pay then you are more inclined to hold on especially with a big gain on longer term holdings. Perhaps I am becoming obsessive about tax as I have been sorting out my tax form in recent days (!!?) and of course AIM shares again (which little woman and I have discussed before) have good tax benefits of holding for at least a year.

Yes, but if you take small losses, (rather than have possibly end up with a large paper loss) then you can put it against your profits, and reduce your overall gain.

What you need to watch is you can end up with an overall CGT liability and a portfolio showing large paper losses and no cash to play with. The one thing good about stop losses is they provide cash flow and minimise losses!

I think I would forget about CGT when selling. A profit is a profit and is ballanced against the overall P&L of the year. The annoying thing is when you make a hell of a profit pay a hell of a tax bill and for 2-3 years trade sideways.

I don't sell just to claim a loss, but I don't mind a smallish loss caused by a stop loss as it releases cash and reduces the overall tax bill. Especially if it releases the cash so that I can buy back later at a much lower price, way under the price I sold at! The stop losses are designed to ignore small sideways movement. Its the bigs ones that cause problems!

I keep a spreadsheet with details of all shares sold. It also has details of the cost of repurchasing (I just enter the current price to check. If its a share that I've take a loss I include it as a cost. I currently have several shares which I could repurchase now so low under what they sold at - I could cover any losses, or increase profits. I just waiting to see when the trend turns and then I'll repurchase and start again.

Well I hope we all had our stops set today, luck I only had two open positions today, bad luck one hit the stop it cost me 450. Well tomorrow is another day... so they say but with such a sell off I think I may stay out, let things settle anyway most of my charts have gone hay wire, time to regroup.

Fred imo stop losses are not the holy grail. I use them to protect me if a share behaves abnormally. Today was abnormal for the whole stockmarket and so an individual falling stock was not abnormal within this market. I don`t want to set my levels in tablets of stone and I think we all should use discretion. I have carefully picked 11 value stocks (for my isa/pep) over several sectors including some blue chips. The average dividend is 5.8% I know I can sleep at night

My trailing stop loss shows on my screen as a white line but I also run a window showing the OBV (on balance volume) smoothed with a 21 day MA. The direction of this MA is very important to me. for 7/11 stocks the MA is still up, 3/11 it is down and 1 is flat. I bought the 3/11 stocks because I was bottom fishing and the MA was already going down. The one stock that does concern me a little is PUB but the candle showing today is an (indecision) doji and I reckon that is pretty good when surrounded by carnage

Just a recap. re PUB. It is intersesting to see that the share price went down to sit on my stop loss line so I also sat tight. Fortunately I am still in and today, so far, is forming a bullish candle

Just shows that stop losses have to go with the flow to some extent

This is one of the problems with stop losses. I must admit I have had many in place and with the movement of the market lowered others. I wish sometimes I hadn't. The problem I have is hodling to many shares. (Will gradually reduced the number to about 10) Holding 25-30% in cash and rotating the cash on hopefully more short term deals.

Also I find it easier to sell at a profit, without being to greedy, than to cut my losses on a new buy eg. BPRG. I hope I will grow up, to be a brave man and take the pain more quickly!!! Buying is to easy, its selling or letting go is the problem. The problem is between believing in your self and false belief ie. ignoring what the market is telling you.

I agree with that Fred. I must say its nice to be content with the middle portion these days

Have you looked at the spread of sectors within your holdings so that the eggs are in several baskets?

Investing Principles

Yes, but one thing I realised after many years that I knew very little about the majority of things I thought I knew a lot about. (This still applies) As far as buying shares in various sectors, in order to spread the cyclical nature of the market is concerned; I would have great difficulties, because I know, I know very little about many of these basic sectors. Again, when I buy a share I tend to look at the function and basic concept of the article being produced and whether it will have a market appeal. (A word processor, for me, was a bolt out of the blue and liberated me to be able to do things I was unable or not prepared to do before. (I could see the potential of this for businesses and other things.)

Having purchase a QL (are you old enough to remember that) my horizon was expanded. Spread sheets, graphics, Archive Data base, word processor, bloody marvellous.

Since then, I have kept an interest if technology companies and shares, electronic and support companies. Although occasionally wandering into other sectors.

Again I think the potential for growth is higher in these sectors and generally responds to the overall market (with a higher beta) and if one is lucky enough to pick a good share it will do well even if the sector as a whole drifts a little.

I think my chances of doing well is better in an area I know a little about or can see the potential of the product.

One of the problems of these sectors is that many of the companies are Pie in the Sky ie, not profit making. Gradually, I will reduce the number of holdings I have in non-profit making companies. Another change of technique, is learning to trade in bigger capital companies with small spreads, larger nms. and suitable TA., although I am sceptical of the latter I am fascinated by.

The problem is I have always been a slow learner and like Brer Rabbit I have always taken risks and love skating with danger. Hence holding BPRG, RTD etc..
But where do you put your stop losses etc..

Fred paragraph 1 is valid re market appeal. I read about FBDU (flying brands) then found out it also held www.gardeningdirect. That same morning in the mail on sunday I had cut out a big ad for gardeningdirect with a view to buying bedding plants. I logged onto the site and before I knew it I had bought 70 worth of plants. I figured out that the product was good and so I bought the shares the week after. The plants have been arriving and they are absolutely A1 (and I`m fussy) (and gardening is defensive)

Perhaps you are young enough to take risks??

The problem is I am old enough to know better and my daughters and grandchildren will tell you. But why change habit of a life time.

Update on Stop losses.

Barclays have just set up stop loss facility for me on my ISAs and PEPS.

The procedure is easy but the main problem now, is that it is only available on the FTSE 350 and the majority of my holdings are in the smaller companies.

SAD. I have put off switching my holdings to Comdirect whose charges are less and have this facility, also I would like to switch from Bar to Com in cash, but now is not the time to sell my holdings.

I have asked Barclays if it is their intention to extend the facility to the smaller companies. I await their response!!!! If any!!!

and the majority of my holdings are in the smaller companies.

I question the wisdom of putting automatically executed stops on small
and micro-cap stocks.

These can get very volatile in the morning on miniscule volume with
hopelessly wide spreads.
You'll always get chancers putting in stupid low bids to catch the
Herberts who put in a 'Sell at Best' order, or indeed...... the very
stop loss you are talking about doing.

I think that you will find that you will get needlessly stopped out.
Work out your mental stop loss, according to the price and reason that you
bought the shares. If they trade lower than this, not spike, you must then
consider that your buy reasons and entry price may be at fault.
Small and micro-caps are a law unto themselves, and TA on the low volume
that they trade on can be very misleading.

IMHO.

Melnibone.