Any ideas around using “stop losses”?

Hi Murray,

There’s no perfect definitive answer around “stop losses” but addressing “losers &/or stocks that fall from grace at any level” is a very important aspect of successful investing. We believe using stop losses on indices, bonds and currencies etc. is far more effective than on individual stocks who are often very prone to news driven knee jerk reactions. A couple of pointers we watch for:

1. We think stop losses are worthwhile for completely mechanical/technical based trading systems where a system can be evaluated through the ‘edge’ it has.
2. If using a stop just for risk management, having entered the position for a fundamental reason, we think this is problematic.  Addressing positioning sizing and overall portfolio structure, thinking about the portfolio as a whole is a better approach in our view.
3. If using a stop loss, make it a stop on close, meaning that it only triggers if it closed below the level, thus removing intra-day moves. A multiple of Average True Range (ATR) as you are using makes total sense.
4. Another option is to trim a position if it moves through a stop level rather than selling it (unless of course the reason for holding it has gone), lessening its net impact in both dollar terms, and your ability to sleep!