Wednesday, 16 August 2017
Why I Use Stop-Loss
One reason we keep a record of our trades is so we can make logical decisions based on real data - not our biases or what other people say.
You know what?
7 out of 10 trades I've made, if I stomach the unrealised losses and "cheat" as in wait-and-hope for weeks, months, and years (let a trade turned into an investment), these losing trades will eventually be money making ones.
So why do I still use stop-loss to realise the actual loss?
Its because I remember vividly those 3 out of 10 trades that almost killed me!
I've let a small paper cut turned gangrenous...
Eventually having to chop off my fingers...
Better this than to lose a whole arm or leg right?
Some traders never do and let the poison reach their hearts. And they are heard no more...
So whether to use stop-loss or not for you is not through listening to others or reading books.
You have to experiment for yourself and let your track record tell you - based on hard data.
Crash got sound.
If you are so good at stock-picking (just lousy at entries) and all your trades will eventually make money, why use stop-loss to protect yourself?
Or if you are skilled at finding 10 baggers to dilute out those occasional small losses like Peter Lynch, why use stop-loss indeed!
That's why whenever I'm in a new job, I prefer to ask for forgiveness than permission. This way, I can flush out the unwritten law of the land - when I still have my honeymoon period!
Crash got sound!
LOL!
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With stop-loss => "crash got sound"
ReplyDeleteWithout stop-loss => "crash got music"
What music? That favourite 楚留香 tune usually played in those solemn events in Singapore. I leave it to the reader to interpret. Haha.
hyon hyom,
DeleteI am reminded someone famous (Peter Lynch?) said this:
"We don't get hurt by positions we did not own that went up. We get hurt by positions we do OWN that went down."
;)
Hi Jared,
DeleteWell said. I will fully agree with the saying after a slight modification - "We don't get hurt FINANCIALLY by positions we did not own that went up. We get hurt FINANCIALLY by positions we do OWN that went down."
One of my favourite scientists, the great Sir Issac Newton, will disagree with the original saying. This genius had a mighty ego. His pride got hurt seriously after he sold South Sea stock and he cannot stand it when everyone around him made money while he did not. After all, he is a genius and the rest are his intellectual inferiors, right? We all know what happened later. What goes up must come down, as Newton himself taught ironically. The guy who gave us the concept of gravity failed to apply the concept of gravity when it mattered most to him. "Crash got music". *Amazing Grace*. Amen.
"I can calculate the motion of heavenly bodies but not the madness of men." I wonder if this genius was shifting the blame to the madness of other men or included his own when he said this.
hyom hyom,
DeleteThat's why trading is seductive for people like me without "papers".
Although markets do make me look a fool, they do not make me feel 2nd class ;)
Mr Market is like a Singaporean who honors his national pledge. "Regardless of race, language or religion" Zero discrimination. 100% fair without prejudice regardless of who you are - man or woman, black or white, Phd or PSLE, handsome or ugly, human or machine. The participant either makes money or lose money. No other excuses.
Deletehyom hyom,
DeleteClosest thing to meritocracy.
We eat what we kill.
It's a very useful tool ... but depends on investing style & temperament lah.
ReplyDeleteNot that useful if you're DCA-ing a few hundred bucks every month into a 50:50 global equity & bond ETFs with re-balancing every 6 or 12 months, and looking to just continue for the next 20-30 years.
OTOH if you want to get your hands dirty & be a commando in the blood-soaked trenches of financial markets like SMOL, then stop-loss can help you avoid getting blown away. Haha!
But it still requires discipline to execute. Sometimes, I still want to cheat & not close the position --- maybe just wait 1 more day ... see how ... maybe head fake...
Have to constantly look at my graph print outs of my portfolio levels during 2007-2009 to remind myself!! Hohoho!!
Spur,
DeleteDollar-cost-averaging is the "look ma; no brains!" scaling-in entry method for passive indexers ;)
These people don't even have an EXIT strategy in 20-30 years time! A bit like like kicking the can down the road?
I'll be surprised anyone will be aware of this Stop-loss tool when EXITs were never part of their game plan!?
Eh? Rebalancing? Then you are not "passive". Wink.
You're a rojak like most of us!
Haha, strictly speaking even the most boring indexes are not passive --- they are actively created using man-made rules ... and annual reviews plus ongoing triggers to determine which companies remain on the index & which ones to kick out & which new companies to accept! Kekeke!!
DeleteThat's why now there are much more "active" ETFs incorporating all kinds of investing/trading methods under the sun. Many such ETFs are doing automated trading on weekly/monthly basis depending on rules & market action. Some even trading on daily basis. Not much different from unit trusts or mutual funds --- instead of human analysts & fund managers, you have computer programs loaded with various trading methodologies & algorithms.
Yeah, in my younger years I was believer in "no brains" MPT and EMH --- DCA, diversified portfolio construction, buy-and-hold, annual rebalance. It's actually not bad approach if you start young and/or have little time to spare & you want to focus on your job skills/career/family/hobbies etc.
But I kena -40% drawdown in 2008-2009 (own fault as I had 80% in equities ... typical will be 60% or 50%). Even though recovered by 2012 (thanks to QE), but I didn't want to experience another round like that. Hence have been using trend following & momentum for past few years. With this I also forgo bond ETFs & allocate fully on risk assets instead. Stop loss based on trend following have replaced bonds as the safety mechanism. Worked well to get me out of markets during short periods in 2011, 2012, 2013, and especially in 2015. And also to get back in when trend changes. Future?? Keeping fingers crossed!!! Hohoho!!!
As for withdrawal / drawdown of portfolio during retirement, there's been a ton of research in the last 25 years. None perfect and all based on historical trends & expectations. Workable based on past 10-15 years of actual retirees experience and on 40 years backtest. But going forward in future ... Who knows??? Academics & market historians will crunch their numbers and spit out probabilities to you ... 75%??
80%?? 90%?? People don't like to think or talk about it as it'll be a choice of hawker centre, food court or restaurant depending on markets, asset allocation, fate & luck ... Oh boy!!
Spur,
DeleteIts so fun to banter with you!
Yup. We started with theories from others with the best of intentions. Bei kambing mah! Or white sheet of paper ;)
Once we have our own "crash got sound" track record, we begin to throw out those that do not work for us, and incorporate new tools and strategies that work for us.
And here we are ;)
Nothing is static or written in stone. If the markets sidelined, you'll see me dump Trend Following like a man-whore and pick-up a new sugar mommy!
LOL!
Stop loss and profit protect are important.
ReplyDeleteBut I realise as a investor I dun really need the platform to have the special order
It can take place in the head. How many times do market crash 10% in minutes ?? Lol
But the spirit of it is decisiveness. Sell at A sell.
I very lucky with Lee metals. Key orders during weekend. Try to sell at entry point and manage yo get it to deal. Thereafter no more chance
Sillyinvestor,
DeleteDon't let the labels of "investor" and "trader" dictate whether you need to use a risk management tool or not.
At individual stock level, "crashes" of more than 10% in minutes are not unheard of...
Let your track record tell you what to do.
Whether your stock picks are boring slow plodders versus schizophrenia penny stocks - a lot of difference!
Decisiveness is right! If we keep 2nd guessing ourselves, we'll never pull the trigger!
smol, the single most important why traders should use stop is we trade with margin! we leverage 10-20 times our trading capital, if we don't use stops, assuming you are active traders, very soon you will be run out of capital.
ReplyDeleteinvestors i don't think they really need to have stop loss in place, unless they too are using leverage in their investment.
to use stop orders or not is really based on your money management (not risk management!).
Deletecoconut,
DeleteOpps! For someone who takes pride of my "precision" in words, I got eggs on my face... LOL!
You are right. To be "precise", it should be money management.
No, I'm not going to get sucked into the debate whether money management is part of risk management; or risk management is part of money management ;)
It's Own Time Own Target. Whether stop-orders help or hinder, everyone of us have to find out for ourselves.
There is one crazy "ang moh" futures trader who never use stop-orders!? He boasts he can trade around that losing position? (Average down say average down lah)
That's not the scary part. Got clients actually give him funds to have him trade for them through the mirror trade service!!!???
If Nick Leeson got use stop-loss, Barings bank would still be around today.
nick leeson was a classic risk management problem, no amount of stop loss can save him, in fact if supposingly he is able to put stop loss order (which he can't cos of his size) he would probably get kill faster!
Deletehe got no money management issue becos the bank can supply him with all the money he wants haha (or at lease that what he thinks)
coconut,
DeleteI guess when you are risking "ah kong's" money, where's the risk?
This is also a lesson in Ownself Check Ownself.
Institutional traders got one advantage in that if they are in a slump, they got their risk managers to pull the plug to prevent them from digging into a deeper hole.
That means those of us who trade in our own dungeons really must know when to walk away and take a break when we are out of sync with the markets!
oh dear, i dont have stop loss. as i type this, sph 2.85 comfort 2.15 singpost 1.24 and i own lotsa these stuff
ReplyDeletenot sure if i am heading for disaster...
can u help me?
LOL! Ang Kong Kong trolling me ;)
DeleteI not the bleeding heart; I the man-whore.
The only advice I would give is, ahem, wear "protection" ;)
Well, you can cure yourself with your own post dated Monday, 15 Dec 2014:
"market slump 60points, more to come?...should u worry?
what a steep fall....more than 70 points during lunch.
as I type this, it is 66 points in the red.
you should NOT worry if
1) the stocks u bought are based on sound fundamental analysis and market ups and downs are beyond anyone's control
2) u are investing on a long time frame.
2) no contra deals involved.
3) no borrowed money.
4) the original plan is still intact,
In my case, I am a dividend investor, so if this fall continues, this sounds like good news for i can buy more for the same amount of dividend received.
I will be a little concerned if a dividend cut happens and will be more concerned if no dividends declared when i expect some. The latter senario is the one i would least expect since the counters i owned, have paid dividends faithfully for the past 1 decade and have weathered several crises. Even if the least expected senario happens, i am satisfied that i should be diversified enough not to be affected too much."
Just to be safe, no harm to visit Waterloo Street Guan Yin Ma to pray that SPH, ComfortDelgro, and Singpost will continue to pay out dividends.
You'll never know the wrath of a dividend investor scorned!
With so much money in mega ETFs, I wonder what will happen during the next roller-coaster ride. Would be interesting to see how things turn out. "Index investors" will have stop loss?! Like you said, crash got sound.
ReplyDeleteKevin,
DeleteIt has never happened before where so much funds are parked in indexed vehicles.
Yup, in the next crisis, we'll know the difference between low cost index funds and low costs index ETFs ;)
Theoratically, for a passive investor who practices dollar cost averaging, there's only planned entries. What exits?
It will be the acid test on one's discipline to follow through. Especially those who confidently say if prices go lower they will gleefully buy more ;)
Dollar cost averaging is fun in a bull market; in a bear market it remains to be seen...
Interesting times!
Scary times...
Haha!! Looks like I'm taking the other side of the bet that there wouldn't be too much difference with the trillions in ETFs. ;)
DeleteETFs don't substantially increase the numbers of people dumping trillions into index stocks. Majority of them simply transferred from mutual funds which had most of the money in the same stocks anyway. Instead of investing or trading individual stocks & mutual funds, they now also use ETFs. In fact active managers & investors should be down on their knees praying that humongous ETFs causes market disruptions & inefficiencies in the markets!! And if many active methods can exploit any market inefficiencies caused by lumbering ETFs, then you'll see retail investors / traders moving from ETFs to active. The system is self-correcting .... of course along the way, may have some fun disruptions like GFC. Hey .... many people struck it rich during 2008-2015 and able to take early retirement!!
From personal experience (6+ years) in trend-following & trailing-stops for ETFs & UTs, I'd say only about 30% are really in the money i.e. selling with most of my gains, markets go into deep-to-moderate slump, and I manage to buy back in at much lower prices when markets just recovering. The rest of the time, it's a wash out ... either flat, or buying back in at higher price than selling price. I.E. I would have been better off just staying invested.
It's fine coz this is the price I pay for insurance. It's main job is not for me to get outsized profits ... it's job is to prevent me from stepping off a cliff...
BTW with regards to DCA, most properly advised investors in developed countries have a plan for lifecycle asset allocations as they near retirement, and a plan for disbursements / drawdown phase. Need to be done holistically, so also taking into account things like national pensions, rental properties, annuities, healthcare coverage, etc. It's only in S'pore and many other 3rd world countries where the focus is on getting customers to sign on the dotted lines & then start calculating how much commissions or bonuses we'll get!! Hahaha!!!
Spur,
DeleteJust ask any retail passive investor in Singapore what's their exit strategy and we'll find out whether that person is following this path through their own volition, or whether they were "sold to" ;)
Individual stock-picking is not easy... STI is near the all time highs, but for those who have vested the majority of their portfolios in O&G stocks when they were the "rage" a few years back, its not a good feeling to be down so much when "passive" investors have beaten them flat...
All because they have not spent time on "defence" - money management. Some must have wished they know about stop-orders...
Sure, O&G will recover when WTI crude bounce back to USD 80 and above. By then, not all listed O&G stocks will remain "listed"...
I know because I got one Jurong Tech that never recovered... It went bankrupt. That's how I learnt about money management ;)
I also want to play like Brazil and only score goals. But to win the World Cup, teams learned they need to have a good defence first.