Friday, March 5, 2010

Using a Virtual Stoploss & Trailing Market Stoploss

Ever get the feeling that just as soon as you place a "stoploss" on one of your positions it gets activated by who knows what and "you're out" with a loss - after which the stock inevitably recovers back to and beyond where you bought in?  The most common reason for this is placing stops that are too tight, setting you up for a trigger during the midday sag that occurs with all but the hottest stocks.  My stops trigger on average at about a 10% loss from the highest price achieved by employing a Trailing Market Stop.  After all, what you're really trying to prevent is a catastrophic loss of capital due to a market meltdown.  However, I also always determine a "virtual stoploss" for every stock I own, always tighter than the TMS I placed.  I keep track of both on a spreadsheet and sell if my virtual stoploss is violated.  That way I'm protected both from a breakdown through the support level and any market meltdown.  How do you work your stops?