Do You Trail Stops?

It’s no secret that “the market” is selling down, with a lot further to go before reaching something approximating ‘fair value’. In the face of such declines, it behooves one to think about ‘protection’, which can take many forms: actively shorting, or buying puts, or just trailing stops (which should already have been put in place). Not many investors trail stops, for several reasons, the least excusable one being they don’t know how to do it and the most common one being they believe that “prices always recover”. Well, sometimes they do. But the wait can be long and uncomfortable. Meanwhile, inflation has eroded the purchasing-power of the capital tied up in those positions.

By temperament, I’m an ‘investor’, not one of them oh-so-naughty ‘traders’ that investors love to disparage, and --as a bond investor, whose intended holding-periods often exceed 30 years-- I scoff at TMF’s pretense that they are “long-term” investors as they zip in and out markets in a mere 3-5 years. But I do indulge in some short-term, recreational trading, just because the game is fun. The other day, I was discussing with my daughter two trades that I had let get away from me. “Where was your stop?” she asked and scolded me up and down for not trailing one.

An aside: She’s the most ruthless trader you’d ever want to meet. She only buys at her price and only sells at her price and has gone as much as three months without a single losing trade. “Get in. Get out. Bank the profits. “Investing” is sheer stupidity in this over-priced, over-bought market.”

Anyhow, I had to confess that I had gotten in without identifying my exit. My bad. So today, as I was picking up shares of the gold and silver miners, I made the extra effort it takes to trail stops. Sometimes, the chart itself suggested to where prices might retrace, and I set my stop just below that. But most times, I just used Wm O’Neil’s rule of thumb of 8%.

So my questions to you are two:

(1) Do you trail stops? (Always? Sometimes? Never?)
(2) What process (or justification) do you use for trailing them or for not trailing them?

Thanks in advance, Arindam

PS The market gods forgave me yesterday’s stupidities, and I got out of the two inverses I had put on at decent profits. But I will never, ever again not trail a stop. I learned my lesson.

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Hey Arindam, thought this might interest you.

This is from an email ad from Tradinformed that I got today (**note-this is not an endorsement, but I like looking at many folks perspectives and approaches and he lives/breathes Excel. I got a couple of his spreadsheets about 10 years ago when they were a couple bucks to learn using Excel for stocks and back-testing out of curiosity. Learned a lot, but do not use much anymore). Using Excel, he is looking at several approaches to preserving capital in market volatility. He focuses on Zig Zag, a simple percentage modulation of selling and buying.

You need to go to about the middle to get to the real meat of the discussion, but basically he supports straight percentage stops and signals to jump back in. Interestingly, he seems to focus in at 8%.

I’ve only skimmed this, but thought you might find it interesting. He did do an earlier video looking at zig zag in 2019, if you are interested:

Happy trading,

PS I variably trail stops, largely based on support levels and influenced by p/l. Longer term dividend stocks, usually don’t. Short term trades usually, and tighten as the profit goes up. Can always jump back into profitable trades if stops hit since no wash rule applies. I need to get more defined and regular about such.

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Good morning to you, and I’m glad someone else is also thinking about these things.

Yeah, there are some traders who do their backtesting in Excel. (E.g., Perry Kaufman, from whose books I’ve learned a lot.) But I find that importing the data and writing the code is more work than I want to do, especially when I’m running tests on hundreds of stocks. Back in the day, I used MetaStock. But then they stopped allowing user-supplied price data. (OmniTrader still allows it.) But two programs I depend on for backtesting are CandlePower and StockAnalyze. (CP is no longer sold or supported. But it’s the best program ever for finding breakouts based on a combo of Candle Pattern Analysis and western-style indicators. SA is a program you might want to demo.)

Yeah, there are many theories on where to set stops. Stan Weinstein goes into them in his book, as do others. But all the methods boil down to these: an unvarying, fixed percentage (Wm O’Neil’s approach), or use of an indicator like Wilder’s SAR, or the old-fashioned way, using hand-drawn trendlines and S&R levels in the chart.

You’re also right about being selective about which positions should be trailed and which can let be run free. E.g., my position in SCX has a stop, but not SLVO, GLDI, or USOI nor any of the hundred or so pfds I’m carrying, though I should’ve with the riskier ones, a couple of which have blown up on me. But the positions were deliberately small, and the divs are cumulative. So I’m going to wait 'em out.


PS Have you been trading the $US? Unbelievably, it’s on a rip and offering good money.

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Can’t say I have messed with currencies. No particular reason, just haven’t.

Stops are tougher in such volatile times as now. Earlier today for me, only two positions were positive, right now, only two are negative. The problem is, five of six major indices in the last two days have broken right at or just below double bottoms from Feb-Mar. Monies are still rotating defensively. VIX was just at 35 but now down to 28 based on ?? A lot of schizophrenia out there, hard not to think of a deceased kitty. No one can predict the market, but have to wonder about a full real capitulation in this cyclical bear as we go into a recession for a quarter or two. Stops be dammed, I’m taking a couple $6k winners on the day and banking now, not waiting for stops at a lower gain. Tomorrow, will reassess.

Curious if you have used TOS OnDemand to backtest? Been trying it. You do have to thinkscript the code but then, you can use the code for scripted orders. Trying to learn it.



The advantage of tracking currencies, even if one doesn’t trade them, is that it gives a fuller picture of the macroeconomics that determine how stocks get priced.

For sure, one could bury one’s head in the sand of TMF’s propaganda and try to claim that such fundamentals don’t matter, that "good companies " will always prosper, no matter that the rest of the world is going to hell. But I prefer to live in a reality where printing money --as the Fed/Treasury cartel has been doing for three decades-- does have adverse consequences, especially now that Russia and China are moving toward pegging their currencies to gold and a commodities basket, and 2/3 of the world’s economies are reducing their use of the $US in international trade. Heck, even the US’s staunch, Mid-east ally, Israel, is reducing the $US dollar in its currency account and replacing it with rubles and yuan. So, why is the $US rallying? Who knows? But right now, that’s the correct trade.

Yeah, no one can predict the future about anything with unfailing accuracy. But making market forecasts ain’t no different than reading the water on a small, free-stone creek and throwing a bug to where fish ought to be. If you raise a fish, well good. If not, you work your way up the creek and try again. The obvious forecast is that the stock market will crash hard and long, because it’s over-priced, over-bought, and no longer supported by even a semblance of genuine fundamentals. So, yeah, grab profits while you can, and buy the stocks back later at a lower, better price.

I love Think or Swim. Best platform ever. IB used to be good for trading. But I yanked my IRA from them and added it to my margin account at TD. Did over 500 round trips last year, too many of them with stuff requiring filing K-1s. The new plan is to confine such trading to the IRA to avoid having to file. As for learning to use Think Script, there’s a ton of tutorials, created and hosted by TD, as well as lots of users who’ve posted them on YouTube.


PS Normally, trades done in an IRA settle T-3. But the TD rep said there was a work-around whereby trades could be settled in real time, offering somewhat the same functionality as a margin account. Also, not may people know that futures can be traded in an IRA. Right now, few need to be doing that. But the time is coming soon when that skill will might make the diff between holding one’s own and getting crushed by falling asset prices amid rising inflation.


Way too funny, but also instructive. Just now, I got kicked out of my trade on SCX.

On 4/25, I bought a single share, because I like the company for having used a lot of its products. That’s Step One of the Peter Lynch process. “Buy what you know”. Step Two is to look at the company’s fundamentals before you buy. SCX’s ST assets covered both its ST and LT liabilities. (Check). Its debt level was satisfactory. (Check.) However, its operating cash flow is negative, therefore debt isn’t well covered (Red flag), though interest on the debt is. So, in terms of ‘financial health’, the company isn’t in the best of shape, but maybe tolerable. Next, I looked at ‘valuation’. SimplyWallStreet, the website I depend upon for doing fundie analysis, gave the company three red flags (out of 6) for not being able to calculate ‘fair value’ nor PEG. That --combined with the 2 red flags out of 6 for ‘health’-- should have been enough to warn me away from buying. “But love is blind”, and I wanted to buy shares.

However, I knew it was a shaky bet. So I dipped a toe with a single share, as well as did something that turned out to be smart. I got in at 6.84 and set a GTC stop at 6.74, which just below the round number of the previous, nearby low, for figuring that if prices fell through that support levl, they’d go even lower, which they did today. (SCX tagged 6.51.) But here’s the good news. SCX is an illiquid, thinly-traded stock. Avg daily vol is just 20k shares, and the bid/ask spread tends to be wide. (E.g., right now, it’s 8 cents.) When you write a stop order at TD, you get a warning that says, “Your execution price might be different than your stop price”. In my case, it was. I was sold at 6.70, which is 4 cents below my stop price. However, given SCX’s illiquidity, the wide spread that prevails, and the direction of prices at that moment, I think 6.70 was a very fair fill.

So, let’s review. If the trade was put on at 6.84 and taken off at 6.70, a loss of ($0.14 cents) per share was incurred, or roughly (-2%). That’s a ‘scratch trade’, and dozens of them can be tolerated if wins exceed them even modestly. E.g., at the same time I went long SCX, I also went long whatever the ticker is for a long on the $US on which I’m up 5.31%. (As ED Sekota sings, "One good trade pays for ‘em all.’) Secondly, and even more importantly, I should never, ever have put on the trade, because the chart for SCX offered no hint that prices would reverse their fall. In short, I was ‘bottom fishing’, trying to catch “a falling knife”, and I got stabbed. Stupid. Stupid. Stupid. I knew better, but love blinded me, and I got my head handed to me.

Explanation: as a Ben Graham follower, I do a lot of bottom-fishing. But the only times that has turned out well is when (1) the fundamentals were sterling, and (2) a price chart showed that the downward trend had reversed. The two have to be in sych. Any other situation is just ‘speculation’ or --worse-- ‘gambling’. Fundamentals have to say the stock (or the bond or whatever) is worth buying. The price chart has to say that NOW is A Good Time.

Why mess with single shares? Why practice using stops? Why do post mortems on trades? Simple. Soon enough, the stock market will crash hard and long, and seeming discounts will be created. But just as in the fall of '08 and the spring of '09, it will be impossible to tell where the bottom is. But some money has to be put to work, or else the opportunity is missed. Not a lot of money, and one has to be prepared to reverse if prices move against you. But some money as to be put to work in a planful, disciplined manner, or else one should find another hobby, and that’s all this investing/trading stuff really is. It’s just a game that Wall Street has convinced us that it is somehow necessary to play, because they know they can get a cut of the action, no matter the direction of prices. Up or down, Wall Street makes their cut on every trade done, on all positions held in street name, etc. But there are better ways to play the game, and there are worse ones. And when markets are under stress --as they soon will be-- isn’t the time to be doing one’s learning.