Limit orders, Stop limit orders: Expiration dates?

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valleyrock
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Limit orders, Stop limit orders: Expiration dates?

Post by valleyrock » Sun Dec 01, 2019 10:01 pm

I plan to do some investing using ETFs, which trade like stocks. I'm thinking it would be wise to try to limit losses using, say, a stop limit order triggering a sale of an ETF when it declines 10%. My limited experience with this approach (at Schwab) is that a stop limit order only stays in effect for something like two months, and then it evaporates if not invoked. Is there a way around this evaporation? I'd like to set it and then not worry about it for a longer time. I'd think this would be a way to limit losses when the next big downtown hits. Any thoughts appreciated.

AlohaJoe
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by AlohaJoe » Sun Dec 01, 2019 10:04 pm

You can type "stop limit" into the search box for this site and find the many threads where people explain why stop limit orders are a bad idea.

MotoTrojan
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by MotoTrojan » Sun Dec 01, 2019 10:15 pm

Terrible idea. Just don’t.

What happens if the market dips 10%, then bounces back? The average investor is even, you’re down 10% for good.

glorat
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by glorat » Mon Dec 02, 2019 3:44 am

valleyrock wrote:
Sun Dec 01, 2019 10:01 pm
I'd think this would be a way to limit losses when the next big downtown hits. Any thoughts appreciated.
Or a way to lock in losses if there is a temporary flash crash.

livesoft
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by livesoft » Mon Dec 02, 2019 4:13 am

I think it would not be wise to use stop limit orders nor stop loss orders if one is investing with ETFs. First, one should be planning to buy more shares when things have dropped in price. Second, one should only buy ETFs that one would like to keep forever. Third, instead of an order submitted days in advance that others can see and take advantage of you, one can have their brokerage firm send a price alert to their smart phone or e-mail account when the price has dropped, so that one can make an intelligent decision at that point about what they should do. For instance, buy more and/or tax-loss harvest and buy replacement shares of something not substantially identical.
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Phineas J. Whoopee
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by Phineas J. Whoopee » Mon Dec 02, 2019 2:44 pm

When the stop price on a stop limit order is crossed, it turns into a limit order. Just like all limit orders it may never be filled.

On a non-limit stop order, when the stop price is crossed it turns into a market order. Just like all market orders you don't know the price at which it will be filled.

Stop orders are not magic, and do not reliably protect against losses.

Their expirations may be a matter of the broker's policy.

PJW

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valleyrock
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by valleyrock » Tue Dec 03, 2019 12:14 pm

Thanks to all who replied.

I suppose that following my current thesis (that a big downturn and recession are imminent) will mean I should stay in cash or cash equivalents now, rather than move to ETFs. Following an inheritance, I've not wanted to take any chances because I'm past retirement age. But I've felt somewhat left out by not investing it.

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Re: Limit orders, Stop limit orders: Expiration dates?

Post by David Jay » Tue Dec 03, 2019 3:29 pm

valleyrock wrote:
Tue Dec 03, 2019 12:14 pm
I suppose that following my current thesis (that a big downturn and recession are imminent) will mean I should stay in cash or cash equivalents now, rather than move to ETFs. Following an inheritance, I've not wanted to take any chances because I'm past retirement age. But I've felt somewhat left out by not investing it.
Here at BH we teach that the primary “control knob” for portfolio risk is your Asset Allocation (AA). We teach that one should set an AA that considers your willingness, ability and need to take risk, and then hold that AA regardless of what the market is doing. In your case, rather than getting into stocks and getting out of stocks, we would recommend that you select a conservative AA and accept the return that the market provides.

For instance, if one has a conservative 30/70 (stock to bond) AA then a “big downturn” - let’s say 30% - is only a 9% drop in portfolio value, which most folks could handle emotionally. Additionally, regular rebalancing of the portfolio - returning the portfolio to 30/70 after a major stock market move - provides a way to “buy low” when stocks are cheap and “sell high” when stocks are expensive.
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by grabiner » Tue Dec 03, 2019 11:33 pm

valleyrock wrote:
Tue Dec 03, 2019 12:14 pm
Thanks to all who replied.

I suppose that following my current thesis (that a big downturn and recession are imminent) will mean I should stay in cash or cash equivalents now, rather than move to ETFs.
A stop order won't help with this, even if it works, unless you sell at the stop point and never go back in. If you buy at $100 and place a stop order at $80 which executes at $80, you have lost 20%. But if you reinvest that $80 in something else, it might drop another 20% to $64, giving you a $36 loss. If you sell at $80 and never get back into the market, you won't lose more than 20%, but you will also be sure of never recovering your loss.

As others have posted, the right way to limit the risk of a market crash is to put part of your portfolio in risky investments (such as stock) and part in low-risk investments (such as high-quality bonds) Expect that your portfolio will lose half the amount in risky investments when the market crashes; this is close to what you would have lost in 2000-2002 and 2007-2009.
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Re: Limit orders, Stop limit orders: Expiration dates?

Post by CurlyDave » Tue Dec 03, 2019 11:44 pm

valleyrock wrote:
Tue Dec 03, 2019 12:14 pm
Thanks to all who replied.

I suppose that following my current thesis (that a big downturn and recession are imminent) will mean I should stay in cash or cash equivalents now, rather than move to ETFs. Following an inheritance, I've not wanted to take any chances because I'm past retirement age. But I've felt somewhat left out by not investing it.
There is yet another type of stop order, which the wiki does not appear to cover, and which is not available at Vanguard, but which is available at most other brokerages. This is the trailing stop, which can be denominated in either dollars or percentages. The way it works is that a 5% trailing stop, for instance, will activate 5% under the highest price a stock attains after the order is placed. At TDA, trailing stops can be placed in any integer percentage. Very small percentage trailing stops will frequently activate due to normal trading fluctuations, but 4, 5 or 6% stops will usually only activate if there is a substantial market move.

A trailing stop is still subject to the "flash crash" problem, but if you are willing to take that risk it can be quite useful. You do not have to place the stop on your entire position in a stock or ETF.

Right now I have an active trailing stop on an ETF. I need to raise cash to pay off an obligation, but for tax reasons I would prefer the sale to be in 2020 instead of 2019. OTOH, I would rather lose the tax savings than suffer the consequence of a substantial market decline. So, I put a 5% trailing stop on enough shares to pay off the obligation even if there is a 5% decline. If it activates this year, I lose the tax advantage, but have limited my exposure to downward market adjustments. If it does not activate, which is the outcome I am hoping for, I cancel it next year and just sell the shares with a market order.

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