Forum Archive Index - June 2001

["ryanrite" <ryanrite@xtra.co.nz>]

This sounds just like me.
I are reading A to Z and looking at programs
Thanks for your advise on settings of stop-losses
Athol
----- Original Message -----
From: Phaedrus <Phaedrus@techemail.com>
To: <sharechat@sharechat.co.nz>
Sent: Friday, June 29, 2001 3:18 PM
Subject: [sharechat] LEARNING TO INVEST >>>>> SETTING STOP-LOSSES


>                       A Personal Perspective.
>  For many years I relied solely on fundamental analysis when making my
investment decisions. I did not use stops at all. Why should I? Either a
stock was worth buying, or it was not. If I bought, and the price fell, the
fundamental reasons that supported my original decision had not changed. In
fact, they were stronger than ever. Selling would have been an irrational
response. I often bought more, averaging down. My stock selection skills
were such that I was right about 60% of the time. By means of occasionally
selling good stocks at a good profit, and holding on to my mistakes, I
gradually selected a portfolio of underperforming stocks. My overall
performance was, as you may guess, mediocre - consistently underperforming
the Index. I was making good gains, but my cumulative losses were negating
them to a significant extent.
>  It was obvious that I must begin using some form of stop-loss, to protect
myself from losing too much when my initial Buy decision proved to be wrong
(or mis-timed, as I preferred to think). The obvious solution seemed to be
to set a given percentage loss at which I would sell. 8% or so seemed about
right to me. When my next losing stock dipped just below an 8% loss, I
reviewed the situation. This stock, while volatile, had excellent
fundamentals. Its value must soon be recognised by the market! I would make
my stoploss level 10% in this case. After all, 8% was a completely arbitrary
figure that I had plucked from the air. The stock dropped a little further,
and the price seemed to stabilise with my loss at about 9.8%. This looked
like the bottom. A week later, a downgraded profit forecast caused the price
to fall 3% overnight. I was now looking at a 13% loss. I could not afford to
confirm a loss of that magnitude by selling, and in any case, I knew the
stock was worth a lo!
>  t more than that. Thus I had yet another losing "longterm investment" and
my self-set stoploss levels had failed to save me from myself. I resolved to
strictly observe my 8% stoploss level from here on. I did so, but noticed
something that I found particularly annoying. Quite often, my stop-loss
would be hit, I would sell, and shortly after, the price would rise, and
keep on rising. I raised the figure to 10%. The same thing happened, though
not quite as often. At about this time I acquired my first computer and
charting programme. I was now able to see trends, and levels of Support and
Resistance. The penny dropped. I was setting my stop-losses at completely
arbitrary levels, unrelated to the stock in question. I could see many cases
where my stoploss was set just above a natural historical price support
level. No wonder I was being flicked out of otherwise profitable trades. I
began setting my stoplosses at just under the nearest support level.
Sometimes this equated to a!
>   2% loss, sometimes to a 20% loss. The difference this single change m
>
> ade to my results was amazing. My stops were now hit surprisingly
infrequently. In addition, I no longer felt free to shift my stops, because
they had been set at the level they were by the market, not by me. Many
other conclusions followed quite logically. By buying close to support
levels, I would lose less money if the market proved me wrong, and make more
if I was right. In a way that I find very hard to describe, my new, market
orientated approach was psychologically liberating. I somehow no longer had
my ego on the line every time I bought. The market (which I now accepted was
bigger than me) would decide if I was right or wrong.
>   It took me quite a while to get rid of my portfolio of dogs, but I am
now beating the Index consistently. I am not sitting on a lot of large
"unrealised" losses, and every single stock I hold is above an established
Support level. It's easily done - any that drop below are sold. Quickly.
>   My "hit rate" remains at about 60%. The market tells me I am wrong four
times out of ten.
>                               Phaedrus.
>
>
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