Kesys to Safe Investing With Stops

Protecting your investment money can be a challenge. There are a few well known and some not so well know ways to protect your investment equity and follow a path of safe investing.

The most common method is to set “stops” that trigger an automatic sell of your holdings whenever the particular stocks, mutual fund or ETF drops a pre-specified amount. A less common method is based on an equity curve that can signal to sell a particular holding or to sell all holdings.

Using Stops

How you setup stops and how or when you implement them is a matter of personal choice and philosophy.

The choices regarding stops include:

  • Percent or actual basis – a ‘percentage stop’ means that if the price of the ETF (for example) drops x% (i.e. 5%) a sell signal is generated; whereas an ‘actual stop’ generates a sell signal when the price drops a specific amount (i.e. 50ยข).
  • Broker activated – by setting your stops with your online broker or representative they will kick-in automatically. Understand, however, that just because stops are set with a broker doesn’t mean a sale will occur at exactly when your stop is triggered because prices can change fast or the brokerage can be swamped with sell orders that can easily result in a different sell price when the order is actually executed.
  • Strategy activated – this is a signal generated by an investment program strategy that then recommends selling and possibly purchase a different position. Depending upon the strategy this can occur daily or even just weekly.

Various questions arise about how to actually implement ‘stops’ and if one technique is better than others.

In most situations many investors will simply execute or have their broker automatically execute the ‘stops’. But if the downturn was a one-day or short-lived price drop the stock may rebound above the ‘stop’ so if the ‘stop’ had been executed it unnecessarily removed you from holding that position.

If a weekly strategy is followed a price drop mid-week may end up being ignored by the ‘stop’ signal because the stock rebounded before the close of the week. If an automatic ‘stop-‘ trade was executed then you either have to buy the position back (which may not be possible in the case of most mutual funds) or wait until a new sell-buy signal is generated in the future.

On the other hand, if the tickers is dropping daily and the ‘stop’ signal is ignored until the end of the week for a ‘weekly strategy’ the drop could be more than the actual ‘stop’. Still weekly trading strategies have proven to be highly successful.

Considering the various options for when and how to implement ‘stops’ comes the perennially debate of: Can you be successful trading just weekly or even less frequently than trading daily or even intro-day?

Surveys that I have seen indicate that weekly traders are just as likely to have the same results as the vast majority of end-of-day traders. A very small minority of end-of-day traders have greater returns than weekly or even occasionally trading investors.

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