Smart investing hurts sometimes…
Having jumped back into investing, I bought some of $DDOG and added a stop-loss to ensure I didn’t drop below 10%. The problem being that it’s risen since then and I still think it’s a great bet for the long term🤕
Any thoughts on 10% being an optimal level? Interested in hearing other people’s views on what level you add a stop loss.
5 days since this has been posted and no takers.
I was hoping to see others opinions on this first before I muddy up the waters, but in the absence of replies, I'll chime in.
The monitoring and management of a position is just as important as the entry. For those who choose to use stop losses, a 10% stop loss level gives a new position plenty of breathing room to absorb the day to day volatility of pretty much all stocks, while protecting from the worst of a plunging downside move because narrative of the underlying business has meaningfully changed (or the broad market is plunging).
Since I only buy stocks in an established uptrend, I find a 10% stop loss on any trade to be more than sufficient. I used to set my stop loss level to be 3 times the 14-day average true range (ATR), but after reading Mark Minervini's books, I've moved to the more simple 10% rule. As Mark says, you'll usually know a trade won't work long before the price falls as far as 10% because there'll be some sort of technical breakdown. Usually there's been a meaningful breach below a support line or you'll see a clear reversal pattern or the narrative about the underlying business has changed for the worse.
If the stock continues to trend up, I'll move the stop loss in chandelier fashion to get to break even point as fast as possible. Once the stock price is 10% above my cost price, my automatic stop loss now sits at the cost price and pretty much ensures I'm not going to lose money. I feels like I now have a "free roll", but I have to remind myself a free roll doesn't exist because I'm still tying up my precious capital in that stock position, so it's eminent to still make a healthy capital gain.
At this point I diverge from the usual "textbook" teaching of managing a trade position. I don't chandelier (increase) my stop loss level higher than my cost price, even if the stock price continues to rise. I know I won't make a loss on that position, so I want to let the stock go up as far as possible and let my winners run.
I move to a "discretionary stop", basing my exit on either a technical breach if I've bought the stock purely on technicals, or an adverse change in business thesis if I've bought to own part of the business. There's a clear delineation between the two cases simply from the amount of time I spend researching the underlying company.
For a stock I've specifically bought for trading purposes, a technical breach could be the stock price falling 3% below a rising 200-Day SMA while the broad market is still in an uptrend. Usually he rule is if the stock in an uptrend reverses direction to record a lower low, I'm out. That's the general rule that seems to cover all reversal trading patterns (head & shoulders, double top, triple top, descending triangle etc).
If I bought the stock because I want to be a fractional owner of the business, usually the breach of the 200-Day SMA is only a call to action to review my underlying business thesis. If my conviction/belief about the business has waned, then it's sold. What's most important to me in this situation is "divergence". If I still like the business, I'm less worried about my position being in correction mode if the broad market is also in correction. But a stock in a clear downtrend while the broad market is still trending up is a big red flag. If I can't find a business reason why the direction of the stock price is moving opposite to the broad market, then it's usually because I haven't looked hard enough. It can be as easy as sentiment cycling out of the industry. There's always a reason. Unlike buying a stock for trade purposes, buying a stock for business reasons requires a business reason (i.e broken business thesis) to get out of the stock.