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Stop Loss Trading Strategies from Techstrat

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Hi Sean,

What is your stop loss strategy?


Minyan Derrick


Trading/Investing -- First, I think it's important to distinguish between running a portfolio and day/very short term trading. If I was putting (and have done) 6, 8, 10 or 15% of my portfolio at risk on a single position for an intraday trade, I will certainly use a stop and it's much tighter than something like 7%. It's probably more like 40-80 cents on a $40-50 stock as an example.

However, for a portfolio management approach stop losses in the IBD (Investors Business Daily) or some traditional sense just don't work. At least not trying to operate in a sector where stocks can move 20-30% in minutes after an earning report.

My view is that it's best to buy stocks on big drops and at better prices the great majority of the time. I do believe in buying breakouts and have featured many on the Buzz & Banter and on this newsletter. However, they tend to be early breakouts.

But getting back to using stops in a portfolio approach, I am a believer that if people mix this with a consensus view of using a stop losses on every trade the results would be terrible. In fact, running a multi-stock portfolio with many stock positions, each with a 7-10% stop loss level just won't work. Simply put, the portfolio manager would be stopped out of nearly every name multiple times per year. To make it worse, that manager would be force selling many of the very names at the time you should be buying.

Another complication here is the machines. I firmly believe that the machines seek out these stock levels on key news events and shoot for them. If you have an open stop order out there for the world to see the machines will shoot for it. But it's also easy enough for the machines to calculate 7-10% stop levels off of short/term or intraday pivot points. It's uncanny how many times these levels get hit in short term trading. In my day/short term trading I look for these sorts of declines to buy into.

The more I think about it, I can't think of any of the great portfolio managers that historically use static and tight stop loss levels. I've never heard Warren Buffet, Einhorn, Leuthhold or others talk about static stop loss levels. It's much more common to find these managers buying into large drops and scaling into positions over time and at multiple levels. So that is what I do.

Further, great long term performance is predicated on the results in a fairly small number of names. Some names will fail or the business will shrink radically. And here in lies a key risk control. You don't want to accumulate large cores or overweights to the names that don't work. On this note, I do have a firm risk controls.

Those risk controls are to scour balance sheets, thematic industry data and company fundamental data and be very selective in what I add/scale into. I have a strong history here and a great example. I have traded/added tons of times to names like Google (GOOG), Broadcom (BRCM), Qualcomm (QCOM), Apple (AAPL), Marvell (MRVL) and Ciena (CIEN)/Finisar (FNSR) as examples. On the other hand, while taking initial positions, I've almost never added to a solar name (save SPWR). In my life, my worst call by far is in these solar names. So while I've been wrong in taking a couple small initial positions, I've been right in not adding materially to them. On the other hand, a name like CIEN or FNSR which might look poor on the sheets, has demonstrably improving metrics and potentially massive changing industry dynamics.

Bottom line, I don't believe there is one right way to handle losers. I think each person/portfolio manager needs to find their own way to deal with them. My keys tend to be industry disruption potential, investment time frame and initial position sizing.


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