Stop loss

As per my previous post I’m switching to mostly trading this year and I’m doing a portfolio overhaul. To have a defensive mindset is critical IMO. Executing the plan is going to be difficult without fixed rules. I’m looking into stop losses today.

Truths about stop-losses that nobody wants to believe (quant-investing.com)

Takeaways from the link above.

  • When applied to a 54 year period a simple stop-loss strategy provided higher returns while at the same time lowering losses substantially
  • A trailing stop loss is better than a traditional (loss from purchase price) stop-loss strategy
  • The best trailing stop-loss percentage to use is either 15% or 20%

In the long run my mental health and the motivation to continue trading for the long run will be benefited by aggressive stop loss rules. It is vital to keep my interest levels high. Seeing red numbers will do a lot of damage.

Image from Presenting The Keller Ratio | Seeking Alpha

I prefer to limit losses early. I’m considering having a stop loss for my entire portfolio as well as for each individual position. Looking at the image above, a drawdown of 10% or more could take a long time to recover.

If the average return of the stock market is around 8% over a long period of time then it will take about a year to recover a 10% drawdawn.

I don’t use fixed stops. I use mental stops. I place alerts through my broker and they will let me know if a price is reached. Prices fluctuate intraday. I will try different ways and come up with some rules to fit my trading. I could sell during the day as soon as the stop hit, use the closing daily, weekly or monthly price. A combination is perhaps best.

I’m considering what I will do if all markets turns sour. Most of my stops would be triggered and I will be tempted to buy other stocks. Bear market are usually shorter then bull markets. However it could take decades of sideways consolidations before a new ATH is reached (Japan). It could be wise to just stay away from the markets.

3-10% stop loss for indiviudal positions?

15-20% stop for total portfolio value? Weekly close?

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