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Online Share Trading

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Setting stop losses for long term investment

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Preston
Super Contributor
Step 1. Determine the Mean (share price) of the share. Step 2. Adjust the mean with the P/E ratio, that will effectively give you a realistic stop loss. Any opinion?
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14 REPLIES 14
BC02
Super Contributor
Maybe Im missing something but how exactly would that work?
If we took GRT as an example, over what period would the mean share price be? and it has a PE of 32, how would one adjust the stop losss with that?
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Preston
Super Contributor
I usually use price period of 5 years to determine Price Mean. PE ratio for this company is unrealistically high. I would consider a basket of PE ratio amongst its peers and possible use an average PE ratio.
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Preston
Super Contributor
This method determine minimum level of stop loss to compensate for return for holding the share. This is net of dividends recieved.
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Rams
Super Contributor
Problem with PE is that PE can go down with both decrease in price and decrease in earnings,my exit is not a stop loss but an exit based on earnings....three consecutive drop in earnings and I exit, whatever the price . Also, if Price lags increase in earnings I buy, or if price is down despite stable earnings, I buy.
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Preston
Super Contributor
Adjust Stop loss on a weekly basis to what the P/E Ratio is at the end of the week. This Adjusted stop loss will be set for the forthcoming week.
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Rams
Super Contributor
Since earnings will not change on a weekly basis, the change in PE is just based on price changes? So it might actually be cheaper to buy...good value at low price....example MPC right now?
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BC02
Super Contributor
just to carry one with the example, GRT has an avg price of 16.35 over 5 years. The PropIndx has a PE of 16.91.
What would your final stop loss value be and How would you adjust the price with the PE?
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Preston
Super Contributor
Yes, especially if the price is closer to the mean or has drop significantly.
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Preston
Super Contributor
1. Ignore closing auction and closing price 2. Traded price per day = Total Value traded/Total Volume 3. Determine traded price for Day 1 and Day 2 4. Determine mean = (Traded price for Day 1 +2)/ 2 days 5. an so on. 6. Once mean is determined , then stop loss = Mean + (Mean adjusted to P/E Ratio)
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Not applicable
so if I understand your rationale correctly, you want to stop yourself out when a share hits its statistical average, which you have just served to define. That seems illogical in my view. I mean, if it starts to trade below its statistical average, then in my view the most probable outcome is that it will snap back. I don't think moving averages of any sort or chandelier type stops are effective - but that is just my style. I prefer to get out when price action tells me to get out - and to me price action is a function of when a share stops outperforming the market average.
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BC02
Super Contributor
but is this for your investments or trades?

There were times even good shares like FBR underperformed.
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Rams
Super Contributor
How do you define underperformance.....price or earnings
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Preston
Super Contributor
Your current share price will alway exceed your share price mean. Setting a stop loss at that level will allow you to accept , in the worst case scenario, a fair return for your investment and not to panic when market is in a sell off Assumption, purchase price of share should be way below the current price mean.
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stores
Super Contributor
Clearly you guys are assuming that you have owned the counter for more than three years in this long term sell senario...Or am I missing something..If less than three years SARS will sap +-40% of gains
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