The Art of Setting Stops

One personal touch with investing that varies between investor to investor is how fast they want to move up stops.  Let’s say if you can’t be in front of a computer all day, then you may want to tell your brokerage to automatically close a trade if a stock price falls below a certain level.  This “certain level” is what you set within your brokerage account.  Let’s say if you’re out grabbing a coffee and the price of one of your stocks continues to fall, you want to be automatically kicked out of the position, and that’s what a stop does.tester

How people move up stops is a very personal type of thing. Some people like to see some type of indication that a bottom has been made. Say for example in August 2004, where you can see a rounded bottom developing.  Some people would just move up the stop to the 12.5 level, right when they see the bottoming level form.  Others may wait to see a little bit more confirmation, because even if there is a rounding bottom, a stock can (and this has happened to me) fluctuate and fall below this bottom, and then start going up.  So if you move up the stop too quickly you will automatically get kicked out of the trade, even though it was just because the stock just wanted to find a better base, before going up. It’s like finding your footing if you’re wall climbing. Sometimes you may slip, but then eventually you find your footing and you continue going up.

Other people will take a more conservative approach and wait for a break out of the high which happened in March or April of 2004. So that’s another approach. But the risk you run here is that price may never hit this level, and could fall, even below the bottom and just keep dropping – and you’d be kicking yourself that you should have exited earlier.  Sot that’s the art behind moving up stops.  Too aggressive, and you can get kicked out quick.  But too conservative, and you may leave yourself open to major pain.

A good compromise is: why not wait for the stock to hit halfway between the range.  That way you can see if the stability is made, and the price confirms itself and continues going up.  The way to determine what works for you is to access your risk tolerance and then adjust to your style of investing. 

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