Stop Loss Strategy

billchecker1

So have been investing in stocks on an idnvidual basis for around a year now and fully accept that I am still in the learning stages.

One of the companies that I own has seen a tremendous rise (Rightmove) and is a company that I wish to hold for the long term for reasons too numerous to go into now.

However this leaves me in the position of a rise of 20% in less than three months. Now my belief is that it wont go back to my buy price but I also want to protect myself from a sudden drop especially as I beleive a wider correction is due.

I am considering placing a stop on this for around 10% over my BE price.

My target price for RMV is £26 which I believe may be hit next year.

Is this a suitible strategy. I believe in protecting capital and there is that saying that a trader never went broke by taking profit.

What are peoples views with this? DO people have similar tactics.

N1AK

billchecker1 wrote: »

Is this a suitible strategy. I believe in protecting capital and there is that saying that a trader never went broke by taking profit.

Never been a fan of that thinking. If you sold a booming stock, then used the money to buy into a company that went bust then 'taking the profit' was one part of the process that lost the money.

A strategy of selling winners and holding losers has been attacked in many places as ineffective. A stock for a company doing well and under-valued is worth keeping even if it increased last year after all.

billchecker1

Sorry I should have said I would look to rebuy.

My thinking is that if it suffered a drop of 10% then it may well drop under 20% then hopefully recover to my target price given time.

Of course the risk to me is that it does drop 10% but then it never goes to my orginal buy price (At 20%) leaving me with the option of buying back in at a higer price or leaving it entirely and missing out on the gains.

PS with results being announced soon, I expect an increase in EPS and combining this with trend lines, fundementals and the change in the housing market I cant see it dropping significantly. I think it is a fantastic stock by the way. I would even buy more at this price if had some spare cash.

Biggles

billchecker1 wrote: »

I believe in protecting capital and there is that saying that a trader never went broke by taking profit.

A 'trader' may well be in the business of taking regular small profits. You are talking very short timescales here and so may consider yourself a trader, but that's fairly hairy stuff for someone who confesses to be on a learning curve.

But I believe an 'investor' never got rich by taking a profit too early. When I've finally sold a share at 5 or 10 times its buying price, I've been very glad I didn't take profits when it doubled.

Glen_Clark

Yes please keep using stop losses.:T For me to buy low and sell high, someone else has to buy high and sell low. And nothing lowers the price of good stocks as well as a wave of stop losses kicking in

billchecker1

A 'trader' may well be in the business of taking regular small profits. You are talking very short timescales here and so may consider yourself a trader, but that's fairly hairy stuff for someone who confesses to be on a learning curve.

Well no I dont want to be a trader.

I am simply trying to gurantee a return of my choosing. Surely this is a good thing for an investor to do? Dont people who long term buy and hold put stop losses in at all?

But I believe an 'investor' never got rich by taking a profit too early. When I've finally sold a share at 5 or 10 times its buying price, I've been very glad I didn't take profits when it doubled.

This point is well taken and of course I am not thinking of implementing a stop to profit. Simply to negate any chance of a loss and guarantee a profit should it fall.


Yes please keep using stop losses.:T For me to buy low and sell high, someone else has to buy high and sell low. And nothing lowers the price of good stocks as well as a wave of stop losses kicking in

Just to clarify, I have no stops in place so you wont be profiting from me.

What I am talking about I suppose is risk management. My thinking is that if I can set the stop at just the right level to allow normal movements then I am sitting on a risk free investment with a guaranteed return, with growth potential (and in this case divi).

Surely that is sensible?

Totton

I see nothing wrong with stop losses but bear in mind that you will not necessarily sell at your stop loss point when the market is falling quickly.

grey_gym_sock

for investing, as opposed to trading, there's certainly no requirement to use stop losses. are there any well-known very successful investors who do use them? (i'm not aware of any.)

i'm not saying that everybody should try to imitate exceptionally successful investors. that may go horribly wrong, if you don't have the same skills as them, which (by definition) most ppl won't have. what i don't see is how stop losses mitigate lack of stock-picking or market-timing skills. (i do see how trackers and buy-and-hold mitigate them.)

Biggles

billchecker1 wrote: »

Surely this is a good thing for an investor to do? Dont people who long term buy and hold put stop losses in at all?

Long term buy and hold? You are talking about a rise of only 20% in 3 months and a 'target price' being reached next year if all goes well, that's quite short term thinking.

Generally, LTBH is just what it says and investors don't tend to set stop-losses on a regular basis; maybe if a share has done really well, maybe 2 or 3 times the buy price or more, and you are getting wary of a reversal, but personally I'm more likely to handle that situation by taking a little profit once or twice as it rises, then I know I'm going to end up ahead whatever.

cepheus

billchecker1 wrote: »

So have been investing in stocks on an idnvidual basis for around a year now and fully accept that I am still in the learning stages.

One of the companies that I own has seen a tremendous rise (Rightmove) and is a company that I wish to hold for the long term for reasons too numerous to go into now.

However this leaves me in the position of a rise of 20% in less than three months. Now my belief is that it wont go back to my buy price but I also want to protect myself from a sudden drop especially as I beleive a wider correction is due.

I am considering placing a stop on this for around 10% over my BE price.

My target price for RMV is £26 which I believe may be hit next year.

Is this a suitible strategy. I believe in protecting capital and there is that saying that a trader never went broke by taking profit.

What are peoples views with this? DO people have similar tactics.

they can be useful as part of a wider investment strategy, but in my experience their effectiveness depends upon the price characteristics of the security concerned. Any analysis of stop losses might under-emphasise their benefits due to rare events which might be excluded from the analysis.

This link may be useful although it is based on US stocks

The value of stop loss strategies

Adam Y.C. Lei, Huihua Li

Abstract
Stop loss strategies can prevent investors from holding their losing investments too long by automatically prompting the sales of losing investments. We examine the impacts of stop loss strategies on the return and risk of individual common stocks. Our results indicate that these strategies neither reduce nor increase investors’ losses relative to a buy-and-hold strategy once we extend security returns from past realizations to possible future paths. One unique stop loss mechanism, nevertheless, helps investors to reduce investment risk. These findings suggest that the value of stop loss strategies may come largely from risk reduction rather than return improvement.

Bazofts_Revenge

If you are so confident in the company then rather than set yourself a stop loss set yourself a price alert as a trigger to buy if theres a sudden drop but make sure you are keeping an eye on the companies news bulletins. I've not looked at the finance side but popularity wise it does seem a good investment on the principle it is seen to be the default House searching site for most people. Does fish4homes still exist?