What would Winston Churchill say about stop losses?

Here’s a post on stop loss orders from the Abnormal Returns archives. Tadas looked at what a number of others have written about using stop loss orders, including Justin Wilcox:

He goes on to note a better way traders should frame their thoughts about stop loss orders:

One thing that has helped me immensely is to not think about stops from the view point of the exit of a trade gone bad, but to view it as simply the exit from a trade. The execution of the plan you have for the trading day should effect where your stops go more than anything else.

And Eddy Elfenbein:

The lesson for investors is that your thesis can be right but it may take a long time to see it pay off. I remember Peter Lynch saying that his stocks did best in the second or third year that he owned them.

He concludes with what Churchill may have said about stop loss orders:

No one pretends that democracy [stop loss orders are] is perfect or all-wise. Indeed, it has been said that democracy [stop loss orders are] is the worst form of government [risk management] except all those other forms that have been tried from time to time.

via Winston Churchill on stop loss orders at abnormalreturns.com

Dollar cost averaging with stop loss orders?

More on stop loss orders, which are called The Most Important Trading Tactic in this article from The Balance. The idea of stop-losses is great. In practice, I’m less convinced.

The optimal degree of the stop-loss price is different for every investor, and sometimes may be as low as a few percent. For others the level could be as great as 30 percent, sometimes even larger. For example, some investors may set their stop-loss price at 70 cents for shares which were bought at $1. Whatever level each person chooses represents their total downside risk.

An effective strategy to protect against downside, and preserve potential gains, is to use multiple stop-loss prices.  For example, you may commit to selling a portion of the shares at one price, then another part at an even lower level.  Using our example once more, when the shares hit $2.85, you may have established a mental stop-loss at $2.50 for one-third of the shares, then another at $2.00 for the remaining two-thirds.

Tips for successfully using stop loss orders

A few highlights from the post 10 Great Tips For Using Stop Loss Orders Successfully at StockTrader.com.

1. Never use stop loss orders for active trading. For investors that watch their screens all day and are involved in day trading a stop loss order serves little purpose.

4. For the original placement always give the stock atleast 5% of space to avoid market maker abuse. If the stock is trading at $100, a stop loss should be no higher than $95 initially as intraday price swings may cause the order to trigger prematurely

9. Set the trigger price at common price increments. Prices like $100 or $60.50 are far more common to be traded at than $123.47. By placing the trigger price at a common increment there is a smaller chance of the stock “trading through” the order trigger.

Stop limits kicked in on nearly my entire portfolio this week as the market has dropped relatively significantly across the board. A few stocks have popped back above my selling positions, though overall it’s saved me from a lot of losses. I’m still unsure if this is the best practice moving forward, since some gains were lost and some items sold at “flash crash” type prices, possibly engineered by Wall Street in some way.