Sunday, April 20, 2014

Rethinking Stops

Some type of stop is necessary to prevent significant portfolio risk.  They have they their downside in that they are frequently sought out and you can get your pocket picked on an interlay move.  I had two recent stocks where my stops get triggered.  I had considered these types of situations a necessary evil to protect against more substantial risks.

I've since read a a few books and blogs by experienced investors and traders.  David Dreman, a famous contrarian suggests not using them at all.  He points to examples of the flash crash.   Dreman  would sell when his fundamental criteria was realized or if the fundamentals worsen.  John Boorman, a trend trader, suggests stops based only on daily closes.  In other words, an inter-day move would not trigger a stop (in which case I would still be in YNDX) with a nice profit), but a close below the stop would cause him to sell on the open the next day.

The risk in the Boorman approach is that slippage would be greater.  To compensate for the slippage risk, I would probably have to take smaller positions.

I need to perform some more research before adopting a new approach, but I have seen enough already that the research  should will be valuable to my bottom line.

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