Controlling Risk with Stop Loss Alerts
Using Stop Loss Alerts
The principal here is risk control. The second concept is simply my educated guess.
Controlling your risk – setting your point of “maximum pain” and sticking to it – is critical not only to making big profits, but also to simply “living to fight another day” in the markets. Set a price point or percentage and adjust as needed.
Controlling risk trumps whatever my opinion is about the markets. Plain and simple. And it always will.
This idea is far more important than my guess about where the markets are going. Investors do not have a crystal ball therefore guessing the direction of the market is a losing battle.
Controlling your risk is also extremely difficult to put into action. The thing is, you have to do it. You can’t risk seeing your retirement go down with the ship.
It’s irrelevant whether you’re locking in a big gain or taking a loss… The key thing is GETTING OUT – controlling your risk – when the time comes.
What percentage loss will depend on your time horizons and risk tolerance. If you set to narrow, then you are likely to stop out too soon; on the other hand, setting too high a percentage will increase your risk.
So what is the best percentage?
For myself, I usually start with a 25 % trailing stop loss on common stock, 15 % trailing for mutual funds and exchange traded funds. Typically, I use this strategy for large to mid-size cap securities and 33 to 35 % on small cap securities.
Personally I like to trim (adjust) my percentages when any security has appreciated at least 50 % or more to protect my gains. I strongly believe you need to allow your winners to grow and cut short your losers.
It is important when using stops that you do not place directly with your broker as to not show your hand so to speak. Track your positions using software or an online service.
Action Alerts PLUS: Jim Cramer & Jack Mohr from Katie Miller on Vimeo.
Financial Quote of the Week – The prevailing – and foolish – attitude is that a good manager can be a good manager anywhere, with no special knowledge of the production process he’s managing. A man with a financial background may know nothing about manufacturing shoes or cars, but he’s put in charge anyway. W. Edwards Deming
Daniel F. Iuculano, AAMS CMFC
Accredited Asset Management Specialist
Chartered Mutual Fund Counselor
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