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I don't want to debate the merits of stop loss orders; but, for those who use them, I would like to know how you set the stop-loss price. From what I can gather, there are a zillion different ways -- 67% retracement value, straight % decline (like: sell after 5% loss etc), penetration price of a moving average and so on. So ... how're you doing it with your ETFs and/or stocks?
I use stop limits for trading leveraged ETFs in my play money portfolio as a necessity.
There is no clean mechanical solution and it doesn't always result in what you want. What you use depends a lot on how often you want to trade, whether it is a defensive measure or a catastrophic insurance. It also depends on whether you are trying to protect profits or limit losses depending on what the fund or stock has done so far.
First, stop orders are to be avoided except as catastrophic insurance since it becomes a market order as soon as the stop is reached. Flash crashes will penalize these. I typically use stop limits which becomes a limit order after the stop is reached. But this is useless if the fund plunges deeply past your limit and if you have set it as good till canceled, it may get executed when the fund is on its way up forcing a sell at a low missing the recovery.
Often, I use a generous stop limit with a tight limit below the stop and if it punches through, replace it with a tight stop and a generous limit as insurance for further declines. Most retail platforms do not allow multiple stop orders on the same lot.
The early morning volatility when prices reverse more often than not can make your stop orders trigger unnecessarily at a low. So, I don't use good till cancel order unless it is for protecting profits where a trailing stop is available and the momentum is still up for the fund or daily orders if I have the time.
As to where to place it is a more difficult question. Protecting profits is easier than limiting losses. For the former, a minimum profit percent would work and is simpler than using technicals. For the latter, it would be best to use some technical measures including momentum. If the momentum us up, you can use stop limits as catastrophic insurance set at a 200 day moving average if you don't want frequent trades or smaller MA if you trade often. You can use 2xSD levels to set stops for catastrophic losses. If the momentum is down, you can make a mental estimate of what losses you are willing to accept and move on and set a limit there.
Anything more complicated using TA is an attempt to use stop orders as part of a trading strategy (as opposed to insurance) and I have not found a fail safe way to do that.
I view stop orders as more of an insurance than as part of a trading strategy. The goal is to protect profits or to walk away from ideas that didn't work.
If you have access to a platform that allows algorithmic orders and you have an aptitude for programming, you can do some interesting stuff to minimize false triggers but this is not possible with typical retail platforms.
Comments
Regards,
Ted
http://www.schwab.com/public/schwab/resource_center/expert_insight/investing_strategies/trading/be_defensive_use_stop_orders.html
There is no clean mechanical solution and it doesn't always result in what you want. What you use depends a lot on how often you want to trade, whether it is a defensive measure or a catastrophic insurance. It also depends on whether you are trying to protect profits or limit losses depending on what the fund or stock has done so far.
First, stop orders are to be avoided except as catastrophic insurance since it becomes a market order as soon as the stop is reached. Flash crashes will penalize these. I typically use stop limits which becomes a limit order after the stop is reached. But this is useless if the fund plunges deeply past your limit and if you have set it as good till canceled, it may get executed when the fund is on its way up forcing a sell at a low missing the recovery.
Often, I use a generous stop limit with a tight limit below the stop and if it punches through, replace it with a tight stop and a generous limit as insurance for further declines. Most retail platforms do not allow multiple stop orders on the same lot.
The early morning volatility when prices reverse more often than not can make your stop orders trigger unnecessarily at a low. So, I don't use good till cancel order unless it is for protecting profits where a trailing stop is available and the momentum is still up for the fund or daily orders if I have the time.
As to where to place it is a more difficult question. Protecting profits is easier than limiting losses. For the former, a minimum profit percent would work and is simpler than using technicals. For the latter, it would be best to use some technical measures including momentum. If the momentum us up, you can use stop limits as catastrophic insurance set at a 200 day moving average if you don't want frequent trades or smaller MA if you trade often. You can use 2xSD levels to set stops for catastrophic losses. If the momentum is down, you can make a mental estimate of what losses you are willing to accept and move on and set a limit there.
Anything more complicated using TA is an attempt to use stop orders as part of a trading strategy (as opposed to insurance) and I have not found a fail safe way to do that.
I view stop orders as more of an insurance than as part of a trading strategy. The goal is to protect profits or to walk away from ideas that didn't work.
If you have access to a platform that allows algorithmic orders and you have an aptitude for programming, you can do some interesting stuff to minimize false triggers but this is not possible with typical retail platforms.