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Online Share Trading

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Stop Losses

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Frequent Contributor
I have come across some interesting exercises recently that show that in many cases in a Long Term Portfolio a sell at 50% gain beats a hold for even higher profits. Also that a portfolio with a 20 % Stop Loss many times will outperform a portfolio with a 10% Stop Loss. Doesn't seem to make sense but the figures show differently. I was looking at US shares. Doubt if that makes any difference. Any thoughts please.
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13 REPLIES 13
Frequent Contributor
It makes perfect sense because you will be exposed to the market for a longer period. However, we cannot foresee the future. Waiting for 50% profit may take too long, giving a poor rate of return. On the stop loss side, common sense may force you to sell long before a 20% dive. There will however be an optimum some where inbetween the 50% and 20% levels for a predictable future.
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Frequent Contributor
It makes perfect sense because you will be exposed to the market for a longer period. However, we cannot foresee the future. Waiting for 50% profit may take too long, giving a poor rate of return. On the stop loss side, common sense may force you to sell long before a 20% dive. There will however be an optimum some where inbetween the 50% and 20% levels for a predictable future.
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Regular Contributor
Try and get the e-book "Re-examining the Hidden Costs of the Stop-Loss". They've done an extensive study and concluded that "We found that the perceived benefits of the stop-loss were largely balanced out by the hidden costs. As a result there is no inherent edge to be found in stop-losses or profit-taking stops. Furthermore, there is no clear optimal location to place a stop. As the stop moves further away from the asset price, the expected distribution of the stop-loss approaches that of the asset return distribution without a stop." Importantly, this study refers to Investments in shares and not Trading of shares. Stop losses reduce risk, it does not increase the probability of profitability.
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Super Contributor
agree...all about reducing risk. But not s sure about stop losses with long term investments...if the fundamentals change, rather get out manually, than at the stop loss?
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Super Contributor
Furthermore, shares trade in different ranges due to their different business activities, I have always found that by using a multiply of the average trading range (ATR) I have reduced been stopped out uneccessarily. A multiply of 5 for investing works fine for me, and it will mean that one share my stop loss might be 18 % and on another share it might be 10 %.
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Super Contributor
TOPIX, whats the hidden costs?
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Regular Contributor
You have the obvious costs of slippage and brokerage. Then you have 1. "the increased probability of being stopped out", 2. the "opportunity cost - the potential return given up if the price crosses the stop and then returns to the positive range" and 3. "higher portfolio volatility", in that increased leverage must be used to get back to the same exposure if you took profit too soon.
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Frequent Contributor
Stoploss hunting is real and an opportunistic way of robbing smaller(?) investors and traders. This might be the most important factor to consider when setting stop loss levels, especially under current market conditions. Much is to be found on stoploss hunting by googling the keywords "trader stoploss hunting". This moring I noticed a massive "at market" order for BIL and was wondering if this order is related to stop loss hunting. We can't win, can we??
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Valued Contributor
that massive "massive "at market" order for BIL" is called the opening auction ..
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Frequent Contributor
Admit I still don't fully understand the workings of the opening auction. Why is it "at market" and does it include orders placed after hours? Something else I was wondering about: Do the large institutions trade by hand or is it all done electronically by computers?
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Valued Contributor
@market pretty much ensures you get teh stock, or sell it if there is enough on the other side .. and yes it would include @market orders placed after the previous close ..
institution trade electronically but thopse orders are mostly enetered by hand,
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Frequent Contributor
Thanks Simon. As far as the BIL this morning is concerned, will it be correct to assume that the massive @market sell order is the reason for the almost immediate sharp decline in price and a possible multitude of stoplosses triggered? The current market conditions will certainly promote stop loss triggering since we have volatility and the market is probably at a low point. That was what made me think of stoploss hunting.
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Valued Contributor
stop loss hunting will only happen in low liquid stocks, which BIL is not ..
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