Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Rocky Balboa on Investing

InvestorEducation / Learning to Invest Jul 29, 2009 - 02:38 AM GMT

By: Richard_Shaw

InvestorEducation

Best Financial Markets Analysis ArticleRocky Balboa actually never talked about investing, but while preparing for a fight he said ” It ain’t how hard you can hit. It’s how hard you can get hit.”

Those words from a simple man are a simple explanation of part of our approach to investment decisions for those of our clients who have completed the accumulation stage of their financial lives, and now rely on their assets to support lifestyle.


It’s not how much you can gain (or how high the income stream). It’s how much loss you can take emotionally and financially.

The time to think about your loss potential and loss tolerance is before you invest, not after you invest, when you may face adverse price movements.

By whatever means you use to judge gain potential, make sure you also judge loss potential, and weigh one against the other.

Generally, you should be comfortable that the potential gain substantially exceeds the potential loss — being mindful of the probability of gain or loss, as well as the amount of gain or loss.

If you use trailing stop loss orders or mental stops, you can effectively set boundaries on potential losses; but make sure that the stop loss point is outside of the noisy volatility area.  There are several tools you can use to chose a stop loss point, some which are more readily accessible than others.

For example, among other methods, you can use prices just below apparent support levels on the chart as possible stop levels; or you can develop stop loss points using the historic volatility of the security, or the implied volatility in the options pricing.

Here are some charts for several different securities using readily available features to help set stop loss points.  They show the 13-week price channels, the 13-week rate of change, and the 13-week average true range, each of which might be useful in helping to establish an idea of where the stop loss may need to be to “stay in the game” without too much worry about noise knocking you out of your position.  That applies to being knocked out for a loss before your security rises by at least as much as the stop loss amount or percentage, but also to being knocked out after the security has risen and is on its upward path.

With the price channels, you might consider a price just below the lower channel as a stop loss point.

With the rate of change, you might expect that the percentage price fluctuation in the near future could resemble the percentage price fluctuation in the recent past, and chose to use 1.0 to 1.5 times that amount as your stop percentage.

With average true range, you might similarly expect the amount of the price change to fluctuate in the near future in a way similar to the recent past and use a 1.0 to 1.5 multiple of that amount as a Dollar amount of your stop.

Of course any Dollar amount stop could be expressed as a percentage stop, or the other way around.   We prefer percentage, because as the price of the security rises the percentage approach maintains the same relationship to the market price as when the position was opened.

An important take away from the charts below is to notice that each security has its own particular behavior pattern, and that a single percentage for all trades is too simplistic. It is also important to realize that the different methods will not produce equal suggestions as to the stop loss.  They are just suggestions, not precise calculations or predictions, but considering them is better than considering nothing.  In the end, you need to use judgment about your circumstances and the circumstances of each security to set the stop loss parameters.

For those who say stop loss orders are not a good idea, we ask if they wish they had some before October 2008.  Even if you don’t use close stops, use catastrophic loss stops.

SPY

FXI


TLT

EWG

EWJ

BAC

FXE

GLD

Securities mentioned in this article: SPY, FXI, TLT, EWG, EWJ, BAC, FXE, GLD

Disclosure: We own some, but not all securities mentioned in this article.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2009 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules