Stop-Limit vs. Trailing Stop Loss

Manage
1

Neophyte here…

I am trying to figure out how a “Trailing Stop Loss” is different from a “Stop-Limit”?

Is one better than another?

Can I use them in a similar way?

Any help would be greatly appreciated.

2

A trailing stop is a stop limit that is not static.

The stop limit is calculated using your buy price.
You buy a stock at 10$, then a -10% stop limit , means that you will sell the stock if it drop to 9$.

while a trailling stop is calculated using the highest price reached by a stock while you are holding it.
You buy a stock at 10$, the trailling stop is -10% (you will sell the stock if it drop to 9$ , same like stop limit), then the stock goes up to 20$, now with a trailling stop at -10% , you will sell the stock if it drop to 18$ (while with the stop limit, you will sell it only when it drop to 9$)

hope this was clear

3

Are you saying that a “Stop-Limit” is similar to a “Trailing Stop-Loss” except that it requires more monitoring and adjustment?

4

We need to be careful with terminology here. Different brokers use their own terminology, but most use something like this:

A ‘stop loss’ order, or sometimes just ‘stop’ order is a price you set that tells the broker to sell your stock if the price drops below that stop loss price. This stop loss price remains fixed unless you manually change it.

However, many brokers let you set a ‘stop-limit’ price. This is a combination of a stop loss order, and a limit order. This tells the broker to sell the stock if it drops below your stop loss price, but also tells the broker not to sell below a limit price. For example:

You buy a stock at $10.00, and you set a stop loss order at $9.00. This tells the broker to sell your stock if the price ever drops below $9.00. If the stop order gets triggered, the order turns into a market sell order. In some cases, you will get caught in a gap-down, or a very rapid downdraft, and your order might end up being sold at a much lower price than $9.00.

To avoid this, many people use a stop-limit order. Take the same example, and set your stop loss price at $9.00. But if you use a stop-limit order, you will set a second ‘limit’ price at, say, $8.80. That tells the broker to sell your stock if it drops below $9.00, but don’t sell it for anything less than $8.80.

A trailing stop order automatically raises your stop-loss price as the actual price rises. You can usually set a trailing stop as a fixed number or a percentage. Using the same example, if you used a fixed number, you would tell the broker to sell if the price dropped more than $1.00 below the highest price it has hit since you bought it. So if the stock rose to $12.00, it would then be sold if the stock dropped below $11.00. If you used a percentage and set it at 10%, the stock would be sold if it dropped more than 10% below $12.00.

My experience here (any many other members will agree) has shown that you need to be careful with trailing stops. Most portfolios here use small and mid caps, and the stocks tend to move around quite a bit. If you set your stop too tight, you will get ‘whipsawed’ many times. This is a case where a stock sells off quickly, but then rebounds and goes higher. This happens all the time. If your stop is too tight, you will sell when the stock backs off, and you will then watch it run back up without you.

Hope this helps.

Brian

5

“Trailing Stop-Loss” requires more monitoring because it is not fixed and need to be adjusted when stock move, some broker have trailling stop that are adjusted automaticly.

6

I have to note that no kind of stop order would have helped you with Microsoft a couple of days ago, or with Intel last January 17th. They both gapped down about 11% during extended-session trading after earnings announcements, when stops of all kinds are not able to be used. In other words, from one close to the nest open, there was a drop of 11%.

BTW, don’t ask me why I care. [:((]

MJ

7

A bit of a neophyte, I’d like to run by the scrutiny of anyone willing to take a look something I am using.

In order to simulate a stop-loss, I have been using “low(0)<open(0)*.92”, for example, for a sell at -8% from purchase price. It sells, of course, at the end of the day, and so the price is way off. So I download the realized transactions into Excel, sort by the stop loss sell rule and replace all the values for those sales with -8%.

To get the annualized rate, I take the average of the number of days column, divided it into 252 trade days a year, to give the number of periods a year. Then, to get the annualized, I take the average per trade gain/loss. There is a site (for those of not able to do it otherwise) that makes the calculation for you: http://www.tkcs-collins.com/truman/cashflow/int_conv.shtml. (for example, you enter the weekly interest rate, enter the factor 52 and it gives the annualized.) I use this site and enter my per trade percentage and the number of periods.

I cannot figure out if GainPct sells at the close price or threshold price, or whether it sells at close only if the close price reaches the threshold or if the low reached it some time during the day.

Questions:

  1. Does anyone know the formula for “purchase price”? I would love to make formulas using that.

  2. Does anyone see a serious (or important enough) flaw with my system, besides the fact that if only works for a day and assumes you will adjust the stop-loss level daily.

  3. Is replacing with -8% ignoring any significant slippage? I would assume that on a very steep decline it might, but that most of the time it would not matter.

  4. Anyone know of a better way to find the yearly rate from figures like average days per trade, 2.454, and average gain per trade, 0.43?

Thanks,
David

8

David,

I think that the best stop loss rule is: PctFromHi < -x

Where -x = your maximum desired loss %.

This rule is a trailing stop loss that will increase the stop loss $ amount as a stock increases in value, but remain x% below the stock’s high since purchased.

Another rule is GainPct < -x

This will sell a stock if it drops x% below its purchase price.
ALL sell rules will only be tested at each rebalance period.

Denny :sunglasses:

9

Denny,

Thank very much for your feedback. I’ve seen you adding lots of great stuff on the many posts and respect your opinion.

Just a clarification. If I use PctFromHi < -x, the sim will sell at the closing price when I am X% below the hi, is that right? Won’t that give the closing price, not my stop-loss sell price?

Same question for GainPct < -x. Won’t it sell at the end of the day, whereas the stop-loss in my actual portfolio will sell at the price specified in the stop-loss?

Thanks again,
David

10

David,

You are correct. the stop loss will trigger a sell at the price for the close of the day.
There is no way currently on P123 to get the Sim to sell at the stop loss price. That has been asked for, but so far has not been implemented.

Denny:sunglasses:

11

Hi guys,

I am trying to use the formula GainPct < -30 but the system says: Aborted! ERROR: Invalid criteria in Rule 8. Error near ‘GainPct’: Invalid command ‘GainPct’

I put it in the screen rules. Am I doing something wrong?

Thanks

12

You can’t use GainPct with the screener.
Steve