Why I do not use intra-day stops

By: ispeculatornew
Date posted: 10.04.2010 (4:13 am) | Write a Comment  (7 Comments)

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Last week we were able to open a new trade but no such luck this week since our 5 trades remained within boundaries last week. Before getting to today’s post, many of you remember our post about the value of internet properties. Well, my partner and I are launching a new blog dedicated to retirement; DoNotWait.com. We are launching it with a contest filled with prizes including an Ipad! You can go here to take a look!

High Frequency Trading

As all of you know, I believe strongly in stop-losses which basically means that once a trade starts going sour, I will close it out if it reaches a specific performance. In my case, it is generally -20%. That is why the losing trades that you can see in our trades are usually around -20%. Of course, that does not limit the loss to 20% because a trade can move instantly by much more than that without giving an opportunity to close it out. That would of course be the situation for users that were short stocks like Potash or McAfee.

Another “exception” to that 20% limit is intra-day trading. When looking at the performance of a trade, I only look at the close and pay little to no attention to trades that breach the limit during a normal day of trading. Why? There are a few reasons. One would be that I am not spending my entire days looking at these trades which makes it difficult maintain.

Flash crashes

The bigger reason though is not intra-day movements are more violent than a few years ago. What do I mean? Take a stock like Apple (AAPL).  It has over 900 million shares outstanding. That means that a 1$ movement in the stock represents a variation of $900 million in the value of the company. That explains why the stock usually moves by a few pennies at a time. It is not a penny stock nor should it react like one.

That being said, Apple has recently shown that it could be a victim of “flash crash” events which is certainly importante to take notes from.

What is a flash crash?

In May of this year, the entire markets lost billions and billions of dollars in a flash crash when everything started crashing within a few minutes. Certain stocks traded at prices that were virtually 0$. There was no logic to any of it. The consequence was mass panic which caused more selling, more crashing, etc… You see the picture.

Events like this used to be non-existent and while we have not seen other events on such a wide scale, they are happening more frequently. Just take a look at this chart of Apple. In this specific event, there had been a rumor of a departure from the COO towards HP. But that doesn’t explain what happened. How could Apple lose close to $20 billions in market cap in a few seconds?

The main issue of course is that electronic trading now represents a huge proportion of trading on stock markets. A lot of it is based on momentum which creates exaggerated moves in both directions. If Apple starts losing value, these electronic funds will smell a possibility that the stock might lose a lot more and will start selling. That selling occurs very very quickly with large volume. Add dozens of other players with a similar strategy and you will see how quickly things can happen. Some websites such as ZeroHedge have been reporting quite a few of these events.

Back to my trading

Since my trading is done on mostly fundamental factors, I want to avoid being cut out of a trade based on action that occurs within a few seconds. Often the prices come back very shortly to their original prices. Because of that, I think it’s better to avoid intra-day stop losses which also prevents you from entering these limits at the broker. From what I know, any stop loss entered through a broker will be executed as soon as it breaches that point as there is no option to specify that you want a stop-loss on closing prices only.

I would love to hear your thoughts on this. Do you use stop losses? If so, would your trades be “stopped” if such a crash happened and your stock lost 10-20% of its value? Would you want it to be stopped in such a situation?

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7 Comments

  1. […] Speculator presents Why I do not use intra-day stops posted at Intelligent Speculator, saying, “My rationale is explained in the […]

  2. Comment by John Hunter — October 17, 2010 @ 9:14 am

    I agree with you about the problems of intra-day volatility stopping out a position you wouldn’t want to. Leaving them off does increase risk though. In general, I decide not to use them, but I do occasionally use them. One case in which I use them more often is if I close to ready to sell, but am hoping to get some more gains before I do. I might put in a stop loss just to protect me if it falls (and keep going down).

  3. […] Speculator presents Why I do not use intra-day stops posted at Intelligent Speculator, saying, “My rationale is explained in the […]

  4. […] Speculator presents Why I do not use intra-day stops posted at Intelligent Speculator, saying, “My rationale is explained in the […]

  5. […] Speculator presents Why I do not use intra-day stops posted at Intelligent Speculator, saying, “My rationale is explained in the […]

  6. […] Speculator presents Why I do not use intra-day stops posted at Intelligent Speculator, saying, “My rationale is explained in the […]

  7. […] would personally think that one of important things is to avoid intra-day stop loss orders that could be triggered if something went wrong. Often, markets can be wild during the day only to […]

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