Hmm, stop losses.....always a challenge to contend with. The shorter the duration of your trading, the more likely it is that immediate stop loss implementation is the better strategy. If your trading 1 - 3 day type durations, then a wait to the following day would represent a sizable length of time.
For longer term trading, such as several weeks, I prefer to use a combination of immediate and delayed stop loss triggers. For example, if entering a trade based upon a straight line trend, then I implement a stop loss if the price closes below the trend line. If however, just before closing time the price is below the trend line, then I am inclined to exit before the close. Additionaly, when entering a trade I always place an automatic stop loss at about 5% below the buy price. One of my rules is that no trade shall exist without an underlying hard stop loss. One never knows when a stock may plummet, perhaps on a news item or by some large investors getting out.
Another of my trade strageties is based on MA cross overs (10 day & 20 day), in which case a stop loss (or profit take) is triggered by the short term MA falling below the longer term MA. which will trigger an exit to be carried out the next day. Here too, I always have the automatic stop loss in place.
Through back testing I have found that in most cases an automatic stop loss (in my case about 5%) contributes to increased returns, sometimes considerably more.
My way of thinking is that a stop loss trigger, such as price below a trend line, indicates the stock is not following the intent of the trade strategy and so must be discarded until it re-aligns itself with the strategy. But, in the more immediate sense, and more importantly, lets say you have selected 1% of your trading capital as the most you are prepared to lose, then an immediate stop loss must be observed if the price falls to that level at any stage, otherwise you stand to lose more than you can afford. In these situations I like automatic stop losses as if the price falls quickly, I still have a good chance of getting out at the predetermined price. Also, it deprives me the opportunity to fiddle with my strategy. Back testing has shown me that stop losses are the difference between positive and negative returns, so when the proverbial hits the fan, I am out straight away.
Chart Rider
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