A Stop order is an order to sell a stock when its' price hits a preset price to lock in a profit (profit protection) or to limit a loss (stop loss) when the price drops. The reverse is true for a short position.
Once the order is triggered it becomes a market order which is an order to sell the stock at whatever price it will go for. The only problem with this is that it COULD sell for less than anticipated due to market conditions...I have had it happen once or twice when the difference was more than just a few cents. There are other concerns but they are less of a concern than not setting a stop at all.
Picking the stop price
I am trying to pick a nice conservative stop setting rule for my trades that leaves enough room for the price to do it's thing, keeps me from losing my shirt if I am wrong, and lets me use the stop as an exit strategy farther into the trade.
Stay outside of the lower boundary line longer, the Stop Loss Order
The best I can come up with is to leave the stop outside of the trend boundary line (upper and lower blue lines on the chart below) by a certain margin until the price has moved far enough to justify moving it tighter or just higher. In my conservative approach I have moved them tight soon only to have to move them back again as the price moved back toward the trend line. I move the stop quickly to lessen the possible loss should the stock reverse, I need to rethink this action.
I should always consider that if I would be willing to lower the stop again to stay in the trade I should just leave it where it is until there is a large move in the right direction and a good Trend Within a Trend is established. The stop in this case is there to prevent a large loss should the price drop substantially.
Follow the new TWT line, staying in the game
Once the TWT has been plotted (green and red lines on the chart below) it now becomes my new low trend line boundary and I can work with that to get the stop Into The Money.
Tighten it up near the top, Profit Protection
As the price approaches the upper trend boundary line the stop can be tightened up to maximise the profit while still leaving some room for the price to break the trend up. Of course I can also choose to just sell the stock or set a different kind of stop (Virtual Trailing Stop Order VTSO) to follow the price up should it keep going.
Here is a prime example: HF
Red dashed horizontal is my buying price, $11.60 on May 27th. I like to use three days after the bottom as a guide to buy in on this trend style. It allows some level of confirmation of the price action...it looked good. Still does but I just have to have some more patience as the price crawls along the line.
Current Stop $11.15
Purple dashed is my stop price...currently $11.15. On May 30th the price jumped to $12 so for Monday I moved my stop up only to have to move it back down as the price started back down again. You can see the tail on the price for today went below the lower trend boundary...the tail indicates that the trading price went down that low...$11.30 or so...but went right back up again. I'll talk about these "candles" another time, now that they can be seen I should mention them.
The few cents below the line I would just consider part of the margin for error in the trend line setting, it isn't that precise as the lines are drawn on the 6 month or more chart and when we zoom in to 2 or 3 months the margin can be seen clearer. I might move the line to reflect this slightly lower low to accommodate the next cycle low...might as well be closer.
Case 1) Tight stop
The trouble is that a stop set too tight can sell the stock too soon, this is called getting "stopped Out" and I may see a loss or perhaps a small gain but will miss out on a large move right afterwards. Even if getting back into the same stock with another trade the commissions must be paid again and if the price moved up at all that potential profit is lost.
Case 2) Wider stop
The potential loss remains higher for a longer period of time.
The happy medium
This is where the strategy gets a little grey and the gut kicks in. I'm not certain that a plan of attack can be setup to leave enough room for the price to move but keep it close enough to reduce loss off the start. Experience will likely play a big part in getting this right.
I think that certain moving averages may work depending on the expected price change, a long uptrend can easily use the 50 daily moving average while a shorter TWT may be OK with the 10 or 20 daily moving averages. Historical checks seem to lean this way anyway.
JD.
No comments:
Post a Comment