are you confident enough in the selections that you don’t use stops…or if you do use them, what’s been the best range to allow for good stock growth?
kitefighter,
I use stops for two different reasons.
I run a PctFromHi < -xx sell rule in the Sims and Ports. The % value is adjusted for what works best for the type of Trading System I’m running.
I use a different trailing % stop loss with my actual trades for the purpose of protecting my investment from large losses due to bad news or disasters like 9/11 (the Ports can’t read the news). That value is set 5 to 10% above the value in the Ports. If the Port’s stop loss is 20%, I will set my trade’s stop loss at 25% to 30% based on how volatile the stock is.
My Ports only rebalance on the weekend, and are based on Sims that allows a stock to be kept if the price falls below the stop loss % during the week if it rebounds before the weekend. If I used the same stop loss value in my real trades I would have many more whipsaws than the Port, and my trades would not be true to the Sim that the Port was based on.
Denny 
I do not use trailing stops (meaning actual intraday traling stops at my broker vs. the “Trailing Stop” rule that is common in many sims).
The reason that I do not is because that action is not modeled in the simulations that are the basis for my portfolios. To use trailing stops might benefit my portfolios, or it might make them perform worse. If I can’t model it, I can’t know.
For a while I was using trailing stops (typically about 20-25%, depending on the volitility of the stock), but I was frequently stopped out with recommendations to rebuy the same security on the next rebalance.
On balance, I think it hurt me. Regardless, if I can’t model it, I tend not to make manual interventions in my systems.
An entirely separate question may be the use of stops set way low to protect from catastrophic loss dur to some one-off event in the company (fraud suddenly discovered, etc.). I’m sure that’s a good idea, but in truth, I’m too busy (well, I FEEL too busy) to set and cancel them every week, so I don’t do it.
While I have “stop loss” rules in almost all my real money ports, I don’t place stop orders in my account. I have played with using the low function in combination with PctAvg to put stops beyond normal volatility, but it actually deteriorated the performance of my sims. If anything, I’ll eyeball the charts at market open, mid-day, and close, for any major chart damage. But I think the price momentum built into most of the ranking systems does a good enough job at weeding out stocks with significant corrections. Of course, I’d be open to any findings on this!
All,
Back in the old days of 1920s and 1930s, when stock prices didn’t fluctuate much, it must have been nice to know you were protected, if you placed your 80-90% stop loss orders. As of 2006, however, when you face a combination of low commissions, market volatility, NASDAQ stocks, and microcap stocks, I believe there’s little or no protection.
When you face a combination of low commissions, and NASDAQ stocks, and microcap stocks, whenever you place a stop loss order, you’re asking your broker for a disaster to happen. Why? Because, statistically speaking, your stop loss order tends to favor market makers, corporations, and brokers. Not you, the retail investor.
My brokers have never been able to sell ALL of my stocks at all of my stop loss prices, but they surely did their best. Whenever I had a stop loss order on file, my brokers assumed I was asking them to sell my stock at the lowest possible price, at the worst possible moment.
One example of a trigger event was the NASDAQ itself, an electronic, computerized network of brokers. And whenever there was an electronic spike in the price of my stock, one broker picked it up from me, usually at the lowest possible price, at the worst possible moment.
Statistically speaking, whenever the price of a stock dips, in my experience, it tends to recover most of the time. Therefore, statistically speaking, we create losses more often than not, if we keep placing our stop loss orders.
We should be able to back test this idea of stop loss orders, by running a sim over a period of 4.8 years, but, so far, I haven’t been able to find the tool(s) I needed. The “PctFromHi” seems to be the only tool I’ve found so far, but this “PctFromHi” seems to rely on the close of the first day, and ignores both my purchase prices and all market highs as well.
Is the “stop loss” mechanism something that represents real protection? In spite of what your brokers say, no, it isn’t. I say this because, in my experience, whenever I placed a so called “stop market” order, statistically speaking, my brokers made sure they sold my stock at a ridiculously low price, way below my activation price. And whenever I placed a “stop limit” order, then, more often than not, my brokers failed to sell my stock. It just kept going down, therefore I was not protected.
Placing stop loss orders at below built-in stop loss prices is a good idea, but is that going to give you plenty of protection? For example, if your port’s built-in stop loss is -20%, and if that stop loss is made with the help of a “PctFromHi”, and if rebalancing occurs once a week, then that theoretical -20% can be practically everything from -10% to -30%, where -30% represents a built-in loss, if your stock keeps declining from the moment you buy it. Now, how do you keep your real stop loss order below that low-low -30% built-in stop loss? Let’s suppose, you decide you’re going to use -40%… but is that -40% a good enough protection that you really need and want? I tend to believe -40% is little or no protection, which still does more harm than good, especially when it keeps triggering the sale of your stocks, whenever there are spikes in the prices of your stocks.
I’m sorry, if this is not what you want to hear, but this is the truth, and this is based on my experience!
I hope this helps.
Robert
Robert,
Good points. I’ve also experienced this in the past, but it seems to vary depending on the market maker. Just a few months ago I bought a stock 3 times. Each time I set a trailing stop, and each time the MM dropped down to sell my shares, only to rise back off of that price and proceed upward. Other times, for other stocks, I had stops set that were very close to the trading price, but were completely ignored.
I do not set stops with my broker any more. I am rebalancing daily now, and have trailing stop sell rules in most of my ports. This gives me a protection level I can live with for now.
Brian
All,
In my earlier post I said I used a trailing % stop loss on my real trades for disaster protection. This is NOT for performance optimization.
On 9/11 I held 12 stocks. 8 had 20% trailing stop losses and 4 had 25% trailing stop losses. Within the first hour after the first plane hit the World Trade Center all my stocks had been sold due to my trailing stop loss. I was at work at the time and had no access to the internet to manually sell my stocks. Because the prices were falling so fast at the time a few of my stocks weren’t sold until they hit about 35% loss.
However, many of the stocks I was holding continued to fall as mush as 70 and 80% before trading was halted only a few hours later. I saved a LOT of money. The trailing stop loss is not just to keep one stock from losing too much. It is also to keep from losing most of your Portfolio all at once. I will NEVER own a stock again without a trailing stop loss on it! Disaster protection is necessary, and even more critical with Small and Micro Caps.
Denny
PS: My broker is Fidelity, and I have never experienced a problem with a Market Maker selling my trailing stop loss below the market price at the time.
very interesting how each of you view the value of trailing or stop loss orders, or lack of it…good insight for sure and thanks!
as a dissaster protector it seems logical to have them…if you want to take the time to enter the orders…
it seems to me it also would depend on the frequency of access to the internet a person has during a day or week …or the amount of time they want to devote to monitoring the stock movements…vs…the protection against dissaster.
bruce
Robert,
Great discussion!
What broker do you use? Just curious.
Makes me wonder if there are differences in brokers with respect to this.
Mark
A distinction should be made between stops and trailing stops. Stops (imho) are to protect against significant loss, where as trailing stops are to lock in profit. Stops often cause you to sell low, where as trailing stops cause you to sell high (if done right). Stops are tricky to use profitably, where as trailing stops are not quite so tricky. However, even trailing stops are tricky enough.
I sometimes catch a TV show featuring a guru who makes short investments with a -5% trailing stop. In fact, when I put some of his trades in a spreadsheet and looked at them, I think he would not have done nearly so well if not for this technique.
My $0.02
MJ
How your broker treats stops and trailing stops is important. Scottrade cancels all open orders after 30 days or so, thus wiping out your stop orders. Other brokers leave them open till you cancel them or until triggered.
All,
Fidelity cancels stop loss orders listed as “Good Until Cancelled” after 120 days. since I seldom hold a stock longer than 120 days I don’t have to re-enter the stop loss trade very often.
If I place a 20% trailing stop loss order right after I buy a stock it will follow the price up and sell it only if it dropes 20% below the highest inter-day price since it was bought.
Denny
In my limited experience using these screens, I have found that using trailing stop loss orders (10 - 15%) has taken me out of some profitable positions. It’s amazing how many times a stock will suddenly drop on no news and pick off all the trailing stop orders followed in a day or two by a large increase in share price. I have had this happen with three stocks in the past 2 months. It’s very frustrating.
To me the best margin of safety comes from screening for undervalued stocks and buying them on pullbacks as opposed to using stop loss orders.
Hope this helps.
JimJ
Jim,
Seems like I’ve seen that avatar somewhere before.
Mark 
Mark and All,
Thank you.
Yes, in my experience, the BROKER you/I/we choose does make all the difference in the world in terms of slippages, commissions, lengths of GTC orders, the orders you can place, and the customer service you face if you ever get a bad fill.
However, as to stop losses, in my experience, it’s not your broker but the STOCK you choose that makes all the difference in the world. For example, when I was trading MSFT shares day after day, I found the MMs associated with MSFT stocks were some of the toughest brokers I’d ever faced. But, OTOH, when I swiched my attention and money to PEP stocks, I found the specialist of PEP was a real gentleman who often went out of his way to help me, the retail investor.
So what do you do, if you want to avoid unpleasant surprises? First off, choose a great broker (but let’s not get distracted here…). Second, choose a great advisor (but, again, let’s not get distracted here…). Thirdly, and just as importantly, study your prospective MMs and specialists before you buy your stocks. How can you do that? Well, if you want lots of protection, maybe you want to deliberate, hesitate, and take it easy, before you put your money on the line. Why? Because P123 is great, but one of the problems with acting upon instant recommendations (by P123, for example) is that you get your recommendations too suddenly. And because your stock recommendations come to you suddenly, you hardly ever have any time or opportunity to research in advance the specialists or MMs of your prospective stocks. Therefore you leap before look, and therefore you can get unpleasant surprises! Especially if you place any stop loss orders! And especially if you buy stocks from MMs or specialists who are unknown to you!
I hope this helps.
Robert
Robert et. al.,
This continues to be a great discussion, especially for swing trading where you hold stocks for a short length of time. I am very interested in thoughts from you and others.
If the main difference between brokers is the fee (which may not be totally true), I’m thinking the particular broker isn’t a life-and-death thing. When you put the transactions on a spreadsheet, the fee is a really small piece of the pie.
I don’t know a great number of advisors, but I don’t think I believe in them. I could tell stories but it wouldn’t be productive. 
I’m good at deliberating, hesitating, and taking it easy, but I can’t think of any way to do that or anything more productive to do short of just not buying the recommended stock.
Thoughts and comments?
Thanks,
Mark
Some advisors are excellent, but they need neither negators nor new clients.
When you choose, you govern. To govern is to choose.
ESCL today. The company is being investigated, and the stock opened roughly 50% lower than yesterday’s close. The stop would have taken you out immediately this morning. There’s nothing you can do about the gap down, but the stock is still dropping, so the stop would have saved you a few dollars.
The best way to protect against this type of disaster is proper position sizing, or money management. If you hold a total of about 20 stocks, this 50% drop means a 2.5% drop in the overall portfolio, which will not kill your overall returns.
My experience is in line with p123roberts´s first reply, saying that a often a “stop order” sells my stock at the lowest possible price, at the worst possible moment.
Fearing an unpredictable disaster i hedge my portfolio against the Russel 2000 index.
I abandoned from stop orders, when i realized that i might not be able to liquidate (or time the liquidation of) my short position when the market catches on after an (assumed) disaster.
I’ll be the first to admit that it’s hard to know when to pull the plug on a sinking ship but here are the rules I use. I don’t use stops of any kind. I’m not saying that they’re bad but I just choose not to use them. I want to know why a stock is going down before I pull the trigger. So my rule is if the stock gaps down on bad earnings report then I usually bail as soon as I hear it. If the stock is slowly dropping on no news at all then I’ll either stay in and wait for the earnings of sell on laggard. I’ve found that when bad earnings come out the best time to get out is the day of. That night is when the average investor see’s what has happened and they put in a sell the next day so it usually goes lower before it rebounds. (At least this is the trend I’ve noticed on the stocks I invest in).
There is nothing wrong with a trailing stop … just be sure you’re bailing for the right reason. The only reason I can see to stay with a sinking ship is if it comes out with bad news and the stock corrects to far. No earnings numbers are effected and everyone just bails because it’s the trendy thing to do that day.
VPHM is a good example of that. The bad news a month a go was a trigger to get out but the huge drop in price was to much for the case presented. No earnings had been effected and it was a sound company. Sure enough the stock popped off that low by over 30% in a week. Then would have been a good time to bail. The bad news was the time to watch for an exit point but the sudden gap down was too great for the news.
It’s to bad P123 doesn’t update in real time or even daily. I think it would improve the ports a lot. When a company announces on Tues morning after I just bought it monday … well that just means that P123 holds the falling position for the rest of the week 
I just bailed on GEMS this morning after listening to the confrence call. I have a feeling that I’ll get a sell recommendation on Sunday and who knows what the price will be by then.