Truths About Stop Losses

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
gatorman
Posts: 2493
Joined: Wed Oct 31, 2007 9:35 am
Location: The Swamp

Truths About Stop Losses

Post by gatorman »

I found this blog post:
http://www.quant-investing.com/blogs/ge ... to-believe

And thought you might find it thought provoking. The author started out as a non-believer in the efficacy of stop losses, but after reading the papers cited in his blog post changed his mind on the subject and now believes they can be an important tool for limiting portfolio losses.
gatorman
ShiftF5
Posts: 751
Joined: Wed Jan 11, 2012 7:59 pm

Re: Truths About Stop Losses

Post by ShiftF5 »

Back in my stock trading days I would enter a stop loss on every single purchase (in case of a quick reversal).

Having a stop loss entered does not guarantee you wil be filled at that exact spot.

Several times my stop loss was not filled until a much lower price (due to a gap down at the open, for instance).

After several of those and many other trades that washed out - I was cured. Hello Bogleheads.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Truths About Stop Losses

Post by ogd »

This isn't about stop loss orders, it's about a stop loss strategy, that, if anything, is implemented quite lazily (of this I'm always suspicious -- as I am of any parameter that can be tuned to make the backtests work).

Sounds like an equally bad idea to me, though.
skepticalobserver
Posts: 1116
Joined: Tue Jul 29, 2014 11:29 am

Re: Truths About Stop Losses

Post by skepticalobserver »

Most brokers warn that a stop-loss order probably will not be filled any where near the stop-loss price under "fast market" conditions.
nbseer
Posts: 230
Joined: Wed Jan 01, 2014 9:00 am
Location: New Jersey

Re: Truths About Stop Losses

Post by nbseer »

Ha! Seems every time i put in a stop loss order.. the stock drops just enough to trigger the sale, then heads back up again... always wonder if the computers can do that on purpose.. or it's just my bad luck..
Park
Posts: 738
Joined: Sat Nov 06, 2010 4:56 pm

Re: Truths About Stop Losses

Post by Park »

A stop loss strategy strikes me as a variant of trend following (absolute momentum) strategy. Such strategies may be effective when markets are expensive, but I'd like to see how it goes when markets are cheap.

I haven't read the papers, but it's unclear to me whether taxes and costs are taken into account. Do the papers assume the stop loss orders are filled at the stop loss price? As mentioned previously, the former may be lower than the latter.
User avatar
k66
Posts: 504
Joined: Sat Oct 27, 2012 1:36 pm

Re: Truths About Stop Losses

Post by k66 »

nbseer wrote:Ha! Seems every time i put in a stop loss order.. the stock drops just enough to trigger the sale, then heads back up again... always wonder if the computers can do that on purpose.. or it's just my bad luck..
I have head that anyone with higher level data/quote service can in fact see where stops have been placed and may try to knock them out as you suggest. I heard these complaints from traders (when I belonged to a trading club) who would bray on about getting pushed out of a trade because of their stops. Whether it's true or not I don't know but as was noted above: Hello Bogleheads!
LOSER of the Boglehead Contest 2015 | lang may yer lum reek
GoldenFinch
Posts: 2728
Joined: Mon Nov 10, 2014 10:34 pm

Re: Truths About Stop Losses

Post by GoldenFinch »

nbseer wrote:Ha! Seems every time i put in a stop loss order.. the stock drops just enough to trigger the sale, then heads back up again... always wonder if the computers can do that on purpose.. or it's just my bad luck..
This is just part of Murphy's Law as it applies to stock churning, err I mean, trading. I think this bad luck helps one get over the fantasy of fast money and steers one toward less emotional, less stressful, less roller coastery Bogleheadism. The house will win in the long run so I guess if messy stop loss screw ups help one to change their behavior to a more realistic investing strategy, misfiring stop loss functions are providing a service. :happy
User avatar
jfn111
Posts: 1377
Joined: Fri Nov 08, 2013 9:42 pm
Location: Minnesota

Re: Truths About Stop Losses

Post by jfn111 »

I'll use a stop loss when I kinda, sorta want a reason to get rid of the stock. When the stock has been on a fast upward run, esp. after it has doubled from my purchase price, I'll put a stop loss in to protect my profit.
ShiftF5
Posts: 751
Joined: Wed Jan 11, 2012 7:59 pm

Re: Truths About Stop Losses

Post by ShiftF5 »

k66 wrote:
nbseer wrote:Ha! Seems every time i put in a stop loss order.. the stock drops just enough to trigger the sale, then heads back up again... always wonder if the computers can do that on purpose.. or it's just my bad luck..
I have head that anyone with higher level data/quote service can in fact see where stops have been placed and may try to knock them out as you suggest. I heard these complaints from traders (when I belonged to a trading club) who would bray on about getting pushed out of a trade because of their stops. Whether it's true or not I don't know but as was noted above: Hello Bogleheads!
Yes.

It seemed like others could see my stop loss order, come down and touch that price (triggering my sale) and pop right back up.

It happened enough times to convince me it was a losing proposition for my $$.

Hello Bogleheads.
3feetpete
Posts: 613
Joined: Sun Dec 14, 2014 6:30 pm

Re: Truths About Stop Losses

Post by 3feetpete »

When the stock market is volatile, stop losses tend to lock in the losses as I found out the hard way last fall.
Pizzasteve510
Posts: 635
Joined: Sun Jul 27, 2014 3:32 pm

Re: Truths About Stop Losses

Post by Pizzasteve510 »

Edited as duplicative.
Last edited by Pizzasteve510 on Sun Mar 01, 2015 11:42 pm, edited 1 time in total.
ftobin
Posts: 1071
Joined: Fri Mar 20, 2009 3:28 pm

Re: Truths About Stop Losses

Post by ftobin »

ShiftF5 wrote:It seemed like others could see my stop loss order, come down and touch that price (triggering my sale) and pop right back up.
Stop orders are not represented in the market, but your broker has knowledge of them.
selftalk
Posts: 1096
Joined: Thu Mar 08, 2012 9:08 am

Re: Truths About Stop Losses

Post by selftalk »

In my opinion setting stop losses with the specialist is like playing poker and showing every one else your cards. Set them in your mind and take action if you want to when they are hit.
ShiftF5
Posts: 751
Joined: Wed Jan 11, 2012 7:59 pm

Re: Truths About Stop Losses

Post by ShiftF5 »

ftobin wrote:
ShiftF5 wrote:It seemed like others could see my stop loss order, come down and touch that price (triggering my sale) and pop right back up.
Stop orders are not represented in the market, but your broker has knowledge of them.
And the broker wouldn't do anything with that information, would he?
Post Reply