StopLoss Vs Flash Crash May 6 2010

Denny/Steve/Mgrstein/Experts,

I am reading thru stock market books and p123 forums try to use stop loss religiously.

As i am trading 300K avg liquidity; some of the stock had experienced Flash Crash few months ago. But it is good buy with fundmentals and earnings, has good rank with one of the p123 portfolio.
ie., MFLX

Please, guide/suggest me how to use/place stop loss which survive on it’s own Flash Crash(MFLX) or May 5, 2010 event.

Only need to sell on real market crash like 09/11 or Lehman Brothers 11/2009 events.

Thank you for sharing valuable knowledge and experience.
Kumar


K:

 I'm not sure MFLX actually crashed the way the chart indicates.  It could be a database issue or a "bad" trade.

Bill

Bill - it likely happened. They cancelled trades with 60% drop or more. But if his stop loss was 30% then I think he would be out of luck.
Steve

I stopped using a stop loss on all my positions after getting burned once. Now i have an app on my phone that will alert me when one of my positions is close to or below my sell/stop price. I will then monitor the stock and sell it at the end of the day if the stock is still below my stop price. It has worked very well for me.

Derek.

Derek,

That approach will work under “normal” market conditions, but it won’t protect you when the next 9/11 event causes ALL stocks to fall 50 to 80% within 30 minutes of the event. On 9/11 all of my holdings were sold with less than 1/2 the total loss I would have had if I had not been stopped out.

To protest my capital from events like 9/11 I place a trailing stop on all my holdings within a day or so after they are bought. I use a stop value 5% higher than the value that I may have in the sell rules of my Ports.

Derek - what app do you use?

Stitts & All:

 Yeah, his stop could of been triggered but I suspect the fill would be close to $10.  I would not be overly concerned.

 Bill

Hey shsunbarot, I use the app JStock. They have an app for your phone/tablet and software for your computer.
http://jstock.org/

Denny,Steve,Bill,Derek,

Thank you for the responses with details.

I understand

FlashCrash Effect:
In portfolio of 20 stocks holdings, 1 of them got flash crash with 50% loss, still the portfolio will loose only 2.5%
In portfolio of 10 stocks holdings, 1 of them got flash crash with 50% loss, still the portfolio will loose only 5%
In portfolio of 5 stocks holdings, 1 of them got flash crash with 50% loss, still the portfolio will loose only 10%

9/11 Effect:
In portfolio of 5/10/20 stocks holdings, all of them sold using STOP LOSS 30%-40% with average loss = 35%.
In portfolio of 5/10/20 stocks holdings, stop loss not used 50%-80% with average loss = 65%.

Strongly believe,
Risk-Reward
Flash crash is acceptable-Stop Loss will save more and protect capital,

Denny/Steve,

Believe, all of your R2G model uses trailing stop.

How often you calculate price changes from peak to place/change a trailing stop on your order.
I am using IB Webtrader; It has limit order.

Thank you for sharing knowledge
Kumar

Kumar -

(1) why do you presume that one stock will be affected in a Flash Crash?
(2) 9/11 occurred a long time ago. Technology has changed a lot since then with flash fills, HFTs and the like. Do not think you will get filled at your stop price in this age of trading. If you are able to lose 65% of your investments then you should think hard about the composition of your portfolio, not applying stops to micro/smallcaps.
(3) With my broker, I have to place a stop/limit order. They no longer support strict stop orders. This means that you have to place a limit price, beyond which you will not get filled. If you set a limit price too close to your stop then there is a very good chance the price will crash right through your stop and limit and you won’t get filled or be protected. If you set your limit price too far away from your stop then you will likely get filled close to your limit price and not your stop price, incurring a great deal of slippage.
(4) Stops are typically picked off by market makers and now high frequency traders. I have unfortunately experienced this a few more times than I would like.

Your last statement is incorrect. My R2G models do not use trailing stops.

Steve,

(1) Believe, Flash Crash will be targeted for few stocks in a day,
Believe some broker allows conditional sell order;
We can check stop loss with industry <-10% or bench < -10% to catch disaster event and avoid Flash crash.
Any p123 expert can share ideas on this ?

(2) But 9/11 and Lehman Brother events almost all the stock and entire market got crashed.
No one will know for next 3-6 months or years what will happened,

Jim Cramer at CNBC has told around 1st week of March 2009 when Dow was 6800,
He predicted Dow will come under 5000.

(3) Sorry, my statements is incorrect; Your R2G not uses stop loss;
Believe, all of Denny’s R2G uses stop losses.

R2G can’t read news; if some bad news happened for a stocks as FU does last year Nov 2013. Many R2G held the stocks even the FU is not tradable.

Believe, those R2G uses stop losses might have sold FU at least on next rebalance week.

Please, share your experience/ideas if a stocks fall down -30% in a day in big volume still you will hold the stock?

===================
Last year, I have subscribed some R2Gs; when EGY down for -20%; don’t know whether to buy more or sell;
I believe; it will be nice if the R2G description has clear idea; what to do know if stocks bleeding down 20%-30%.
I like disclaimer information from most of your R2Gs at first place.

I find; in my simulation some of the big losers -50+% to -40+% were held for 60 to 90 days with rank 99.XX
Now, I am applying stop loss after 30 days -30% down sell the stock;
I am mentally prepared to loose 30% with any stock even on same day or following week.

=========
Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.

–Warren Buffett

Thank you for sharing knowledge and experience.
Kumar

Kumar -

It is not a problem if a stock drops 30% in one day if you hold a lot of stocks in a diversified portfolio. Selling is a good way to lose money.

I don’t understand why you think a flash crash will only involve a few stocks. In 2010 the S&P 500 index was down at least 6% at one point in the day. That has to involve more than a few stocks.

Anyways, I wish you luck with your stop orders. Just make sure the stops are far far away from the current stock price. And don’t be surprised when you get filled a long way off your stop price. Especially on low liquidity stocks. There is a reason why brokers have stop-limit orders now.

Steve

I agree with Steve that flash crash may not be the right phrase to use. That was a market-wide glitch. That said, it is legitimate to consider the many occassions when individual stocks do take big 20%-30% or so instantaneous whacks.

That’s an important point and in fact many might take it further ans suggest it’s a buying opportunity, for a quick and temporary bounce if nothing else. Realistically, though, this is one area of the market where conventional wisdom can be most dangerous. For one thing, this sort of advice is all over the place. “Ride your winners and sell your losers” and “Buy when others are fearful and sell when others are greedy” are both often repeated and are obviously contradictory. So the bottom line is that you have to address this as just one element of a coherent (and on p123, hopefully reasonably tested) strategy.

Diversification is an obvious measure (more than five holdings).

Another important consideration is the kinds of stocks your models are designed to attract. Some companies are more solid than others. Quick and steep price hits can strike in an impossible or almost-impossible to predict manner. More predictable are the underlying fundamental characteristics of the companies. So you can design your model such as to increase the probability that the stocks have superior bounce-back potential. Assuming I don’t trade margin (an accurate assumption – I don’t), I’m much more comfortable living for a while with a stock that suffered a big paper loss if I’m fine with the company’s essential characteristics than I would be if they were in the portfolio, for example, for no reason other than that size, liquidity and technical characteristics are similar to those that popped every now and then during my simulation test period.

Another very important but seldom discussed (on the forums) consideration is the rebalancing interval you choose. The coming together of Hollywood (which, for Wall Street type films, usually can’t generate exciting visuals through gun-fights or car chases so does this instead by having crowds of traders screaming, running around and gesturing wildly as their terminals flash things at warp speed), modern technology (that lets the average person do things faster than ever before), and garden-variety human impatience has combined to create a sense that faster rebalancing is better, almost more prudent, than longer rebalancing periods. Actually, though, don’t be so sure. Just because we now have the technology to transmit information in nanoseconds doesn’t mean we have the capacity to digest and properly assess it that quickly. The, too, some events simply are longer lasting. Hence many things take longer than one or five days to get reflected in stock prices. For me, for example, I’ve tended to focus on the four-week period. I do have an R2G I actually trade real money with (cherrypicking the blue chips) that’s done well with a five-day rebalancing. But that’s a rarity. Pretty much everything I’ve done has tested, and performed better, with four-week rebalancings (and I’ve taken and recovered from more big hits to individual positions than I can count). I can’t remember how my cherrypicking model worked with four weeks models and given my tendencies, am fully prepared to accept that its decent performance with a five-day rebalancing may be analogous to the chimp that accidentally types great poetry if you leave it in front of a keyboard long enough. Recent work I’ve done is actually suggesting I may want to lean the other way; for example change the analyst 4-week estimate revision formulas/factors I’ve been using into 13-week revisions. Bottom line: quick rebalalancings feel macho and used to be great at funding the college educations of the offspring of the account execs at the old-time full-service brokers, but for us, it really doesn’t give ideas much of a chance to play out nor does it give oddball market events much opportunity to start moving back toward normalcy.

As to stop-loss, which is based on one of those who-knows-if-it’s-really-right adages, I’ve never had any success using it to improve performance. We added it to p123 because we know there is demand for it. If you can make it work for you, fine. But don’t feel you need to use it just because it’s there.

Kumar - here is some light reading for you:

http://www.thestar.com/business/personal_finance/investing/2013/05/13/why_you_should_never_use_stoploss_orders_to_sell_stock.html

http://www.marketwatch.com/story/why-i-stopped-using-stop-loss-orders-2013-05-09

http://www.bloomberg.com/news/articles/2011-01-27/stop-loss-orders-may-lock-in-losses-when-stocks-plunge-in-volatile-markets

http://www.swing-trade-stocks.com/stop-loss-orders.html

http://www.wsj.com/articles/SB10001424052748703950804575242942496526282

http://business.financialpost.com/2013/05/31/5-reasons-investors-cant-set-it-and-forget-it/

http://www.investorbootcamponline.com/blog/the-risk-of-stop-loss-orders.php#.VNLnDJ3F-h0