I seem to have a habit of picking the absolute bottom of a share but this bottom always seems to be bang on my 10% stop loss. I try to ensure that my stops aren’t exactly on a support level so that any shakes won’t take them out immediately. Some trainers say that if a share hits your stop loss then you should sell and I agree that it’s better to take small losses than big but my last few trades have been sold only for them to shoot up minutes later and not look back. I couldn’t have picked the bottom of AZEM better if I tried, I even let that run to 13% because I had such faith and it went up 7% about an hour after I sold. How rigidly do you guys stick to stop losses?
Well, first keep in mind that the scope of a stop loss is exactly what the name implies – to prevent further losses from accumulating on a trade. When buying a stock, one has to assume there is a risk that the value of the stock could decline before you have the opportunity to sell, thereby suffering a loss (a paper loss is still a loss).
So the main risk with stops is that you get the call right but but the market tests the stop first. In reality, this is always a difficult question to answer, a lot depends on your investing / trading style and attitude to risk etc. knowing when to sell or not to sell is as important and difficult as deciding whether to buy. Some simply don’t make use of fixed stops altogether as they don’t like being spiked out. Technical analysis is useful in this area.