Putting in sell stops below your stock ETFs

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ochotona
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Putting in sell stops below your stock ETFs

Post by ochotona » Tue May 05, 2015 7:24 am

I put in sell stops at -20% below recent peak prices on my stocks. I don't want to go through another repeat of the double bear market 2000s.

Of course, if I get stopped out at -20%, then the market teases and pops back up above -20%, then I'm in a quandary; should I stay out, or get back in, or is it just a sucker rally (answer from early 2000s... it was just a sucker rally). The 2008-2009 debacle was simple, in that everything just fell off the cliff.

But "is it a sucker rally" is sort of in the category of, "the seatbelts kept me from getting killed in the car crash crash, the car slide into the river, now water is coming into the passenger compartment, what do I do?"

The right answer is not, "You might drown in you car after a crash, so don't ever wear seatbelts". Be thankful you used safety equipment and survived the impact, then go solve the other problems with what resources you've got left.
Last edited by ochotona on Tue May 05, 2015 7:26 am, edited 1 time in total.
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Re: Putting in sell stops below your stock ETFs

Post by Cortopassi » Tue May 05, 2015 7:45 am

I have tried to use stops in the past.  While I completely understand their usefulness in day trading or short term trading, I have never found them useful for me, for one simple reason like you state -- when to get back in.

The ETF continues down, and you look like a genius, temporarily.  Or it goes right back up, which it has tended to do in the past 5-6 years, and you are in a quandry either way.  You now are letting even more crystal balling and prognostication into the way you are running your PP.

I was never good at getting back in, so most times, I just did not.

It is 50/50 to me, like all attempts at predicting --  if you get stopped at 20%, and set 5% bands around that -- if it drops another 5% you get back in and saved a 5% loss.  If it goes up 5% you get back in and lost a 5% gain, and either at that instant in time will have a 50% chance.  So it is not worth it (for me).
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Re: Putting in sell stops below your stock ETFs

Post by dragoncar » Tue May 05, 2015 9:00 am

Inevitably, the market goes down exactly 20% and returns back up.  More seriously, have you considered the possibility of a flash crash that liquidates your position and then pops back up? 
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Tue May 05, 2015 9:17 am

dragoncar wrote: Inevitably, the market goes down exactly 20% and returns back up.  More seriously, have you considered the possibility of a flash crash that liquidates your position and then pops back up?
Not "Inevitably, the market goes down exactly 20% and returns back up." I did a study on MaxDD with threshold >20%, and found that since the November 1987 Black Monday crash until now, if the S&P500 goes down 20%, there is a quite large chance it keeps going down, and two of those have been catastrophic for investors in the past 15 years.

If there is a true short-duration flash crash because a n00b at a wire house makes an error, I think I'd just have to deal with that occurence. Or, I could set a sell stop limit order, so if the market is really crashing, the order will never execute if the ETF gaps past the limit. Hey, I like that idea.
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Tue May 05, 2015 9:59 am

lordmetroid wrote: If you do following to the bottom, how would you know when it starts climbing again.
No one can ever pick the bottom of a bear market, except by sheer luck. What I would do if stopped out would be start a dollar cost averaging buy program over a period of months or even a year, when the steepest part of the decline may have past.
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Re: Putting in sell stops below your stock ETFs

Post by iwealth » Tue May 05, 2015 10:19 am

The S&P dropped just a bit over 20% during the 2011 summer correction and then rebounded pretty fiercely.

So OK, you have an exit plan. 20% stop. But it sounds like your re-entry plan is muddled and unspecific: "What I would do if stopped out would be start a dollar cost averaging buy program over a period of months or even a year, when the steepest part of the decline may have past." A specific re-entry plan is as important if not more important than your exit plan.

And if you hold a PP, I hope you have similar timing strategies employed on the other assets otherwise you risk exiting stocks at their bottom just as gold and bonds begin their regularly scheduled underperformance.

Anyway, I have no issues with market timing. Backtesting says it works. But timing is just as much about getting back in as it is getting out. Otherwise it's just guaranteed failure.
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Tue May 05, 2015 10:39 am

iwealth wrote: But it sounds like your re-entry plan is muddled and unspecific: "What I would do if stopped out would be start a dollar cost averaging buy program over a period of months or even a year, when the steepest part of the decline may have past." A specific re-entry plan is as important if not more important than your exit plan.
It's all situational, isn't it? The best I can say is "don't try to catch a falling knife", or wait until the market appears to start to form a bottom, then start a buying program. Yes, it's vague and you'll never catch the bottom, but if you sit in one place, you might have another 50% decline. We all have to make decisions in life with incomplete information, with no time to make them.
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Re: Putting in sell stops below your stock ETFs

Post by iwealth » Tue May 05, 2015 10:55 am

ochotona wrote:
iwealth wrote: But it sounds like your re-entry plan is muddled and unspecific: "What I would do if stopped out would be start a dollar cost averaging buy program over a period of months or even a year, when the steepest part of the decline may have past." A specific re-entry plan is as important if not more important than your exit plan.
It's all situational, isn't it? The best I can say is "don't try to catch a falling knife", or wait until the market appears to start to form a bottom, then start a buying program. Yes, it's vague and you'll never catch the bottom, but if you sit in one place, you might have another 50% decline. We all have to make decisions in life with incomplete information, with no time to make them.
If it's all situational, why set a 20% stop? Why not wait till the market "appears' to form a top, then start a selling program? It's vague and you'll never catch the top, but why miss the potential further 50% rise?

Sell signals are no more specific and actionable than buy signals. Making one objective and the other subjective seems unnecessary and dangerous.
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Tue May 05, 2015 11:09 am

iwealth wrote: If it's all situational, why set a 20% stop? Why not wait till the market "appears' to form a top, then start a selling program? It's vague and you'll never catch the top, but why miss the potential further 50% rise?

Sell signals are no more specific and actionable than buy signals. Making one objective and the other subjective seems unnecessary and dangerous.
The PP philosophy is one of auto-rebalancing, of course, taking emotions out of the equation, and in the normal course of events the rebalancing will not be frequent. The -20% sell stop would also be infrequent, once every several years.

I want to keep that same basic portfolio behavior. I would not set a stop just below a market top, because such a stop would be frequently triggered. I want to use stops as firewalls, to let the forest burn down 20%, but not 50%. It's meant to limit major problems, not as a daily tool.

I understand that how to get back in is problematical. Just as a "for instance", I could soon after the sale set a buy limit just at the price I got out at as a safeguard so it doesn't go roaring back up past where I got off and leave me stranded. Then I could just watch it, and if it reaches a price I start to really like, then I could start a buying program. And if I don't manage to do any manual buying, the buy limit would pick me back up on the way up. No losses relative to staying long, but possible exposure to a security on deeper discount.
Last edited by ochotona on Tue May 05, 2015 11:11 am, edited 1 time in total.
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Re: Putting in sell stops below your stock ETFs

Post by Tyler » Wed May 06, 2015 12:43 am

A long-term investor counting on a stop-loss is like building in an automatic sell-low trigger.  IMHO, real diversification is a substantially more effective investing seatbelt.  When stocks dove more than 50% off of their 2007 high, the PP posted an annual gain.  The only action required was to rebalance and buy stocks at a discount.

Always keep your eyes on the big picture. 
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Wed May 06, 2015 7:47 am

Tyler wrote: A long-term investor counting on a stop-loss is like building in an automatic sell-low trigger.  IMHO, real diversification is a substantially more effective investing seatbelt.  When stocks dove more than 50% off of their 2007 high, the PP posted an annual gain.  The only action required was to rebalance and buy stocks at a discount.

Always keep your eyes on the big picture.
But what if the losses on the stock side of the PP during the 2007-2009 crisis had been limited by a firebrake? The results would have been even better. That was a pretty easy case, a -20% sell stop would've worked like a champ, it would've triggered in the last few days of September 2008, after the Lehman debacle.
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Re: Putting in sell stops below your stock ETFs

Post by rickb » Wed May 06, 2015 10:45 am

ochotona wrote:
Tyler wrote: A long-term investor counting on a stop-loss is like building in an automatic sell-low trigger.  IMHO, real diversification is a substantially more effective investing seatbelt.  When stocks dove more than 50% off of their 2007 high, the PP posted an annual gain.  The only action required was to rebalance and buy stocks at a discount.

Always keep your eyes on the big picture.
But what if the losses on the stock side of the PP during the 2007-2009 crisis had been limited by a firebrake? The results would have been even better. That was a pretty easy case, a -20% sell stop would've worked like a champ, it would've triggered in the last few days of September 2008, after the Lehman debacle.
Without a specific algorithm for when to buy back in, what you're saying is useless.  Are you familiar with "value informed indexing" (http://www.passionsaving.com/)?  Basically the idea is if you reduce your stock exposure when the stock market is "high" and increase it when the stock market is "low" you MUST make more money over the long term than someone who just buys and holds the index.  The guy behind this (Rob Bennett) argued this point at BH and was repeatedly asked what his specific algorithm would be.  Rather than offer up an algorithm, he just kept insisting that what he was saying MUST be true (to the point that he was eventually banned).  [BTW - you might notice that by using rebalancing bands you are reducing your exposure when an asset is high and increasing it when an asset is low, so the stock portion of a PP MUST beat buy and hold, right?]

Zooming out a bit - what you're saying is that by using 20% trailing stops (very specific) plus some method to decide when to get back in (very unspecific) you can beat the market over the mid to long term, i.e. you have found the secret for successfully timing the market! 

Let's just say I'm skeptical.
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Re: Putting in sell stops below your stock ETFs

Post by Kbg » Wed May 06, 2015 11:51 am

With regard to stop losses...they pretty much do nothing but decrease performance in any system and MAY reduce DD depending on how they are done. In applying them I believe you are nuts if you don't do some backtesting as to what rules are you going to use for exit and entry. "I think I will get out here and get back in there" is a 99% guaranteed recipe for poorer performance. And they really don't make a lot of sense to me when using a PP for a host of reasons.
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Re: Putting in sell stops below your stock ETFs

Post by Tyler » Wed May 06, 2015 12:18 pm

ochotona wrote: But what if the losses on the stock side of the PP during the 2007-2009 crisis had been limited by a firebrake The results would have been even better. That was a pretty easy case, a -20% sell stop would've worked like a champ, it would've triggered in the last few days of September 2008, after the Lehman debacle.
Panic selling your entire stock allocation near a market bottom with no real plan for getting back in pretty much guarantees that while the short term loss will have been less, your long-term gains will have been irreparably harmed. Further, assuming it's a taxable account and you've been invested a while, you're also stuck with a massive tax bill.  So when you do eventually buy back in, you have significantly less purchasing power.

If it helps you sleep at night, by all means put whatever protections in place that you like. But a good rule of thumb is that you lose money every time you touch your investments. Humans are just not particularly efficient.
Last edited by Tyler on Wed May 06, 2015 1:08 pm, edited 1 time in total.
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Re: Putting in sell stops below your stock ETFs

Post by LC475 » Wed May 06, 2015 3:29 pm

I agree with the naysayers about the exit plan also needing a re-entry plan.  I also agree with not messing with the orthodox PP with stops at all, but for the sake of discussion:

What about re-entering after six months?  This would have "worked like a champ" in 2008-9, right?

Automatically sell all stocks upon a 20% decline from top.
Automatically buy back into stocks exactly 182 days later.

Would backtesting show this to be effective?
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Wed May 06, 2015 5:18 pm

LC475 wrote: I agree with the naysayers about the exit plan also needing a re-entry plan.  I also agree with not messing with the orthodox PP with stops at all, but for the sake of discussion:

What about re-entering after six months?  This would have "worked like a champ" in 2008-9, right?

Automatically sell all stocks upon a 20% decline from top.
Automatically buy back into stocks exactly 182 days later.

Would backtesting show this to be effective?
Sorry I don't recall the name of the author of this momentum strategy, but it was posted here somewhere. You choose one day a month to examine the 300 day SMA, and if it's above you buy, if it's below you sell. That resulted in about monthly trades, and someone showed it theoretically improved on the PP.

However... trading every month is nutty. Too much for me. But a -20% stop would only be hit every few years. Then you only have to answer the question, "how to get back in?", then once in you'd probably stay in for years again.

Maybe the 300 SMA technique PLUS waiting a period of time, because the 2000-2002 event was very jagged, and it would've caught the 300 SMA in a bear trap. But, if you use "sell at -20%, then rebuy at 300 day SMA cross but no sooner than 10 months" then you'd be OK. That would've saved the user a lot of loss.

Have to run. No time to work on this one right now. Interesting ideas.My sell stop orders remain!
Last edited by ochotona on Sat May 16, 2015 4:52 pm, edited 1 time in total.
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Wed May 06, 2015 8:43 pm

Looking at nine -20% or greater S&P500 bears, 1957 to 2009. Sometimes sell stop at -20% followed by buy at 300 day SMA cross works, sometimes it doesn't. More benefits during bad bears, doesn't react fast enough during mild ones. Will tabulate results later. Cool looking at data from way you were born.

Another idea occurs to me... the sell stops don't have to sell 100% of your holdings.
Last edited by ochotona on Thu May 07, 2015 8:28 am, edited 1 time in total.
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Sat May 09, 2015 8:11 am

S&P500 study

sell signal: -20% from peak
buy signal:  price crosses 300 day SMA, evaluate first of the month only

Year                  sell        buy      gain/loss
1957              38.98    43.69    -11%
1962              57.27    66.31    -14%
1966              75.10    86.43    -13%
69-70            85.88    87.47    -2%
73-74            93.90      83.03    +13%
80-82          111.59    118.25    -6%
1987            224.84    272.59  -18%
00-02        1180.16    946.11  +25%
07-09        1436.27  1002.63  +43%

+2% gain over the past 58 years. CAGR 0.03%.

The teaser though... it has worked on the biggest bear markets. But you don't know what kind of bear market you have by the time the sell signal pops up.  :-\
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Re: Putting in sell stops below your stock ETFs

Post by Kbg » Sat May 09, 2015 2:17 pm

ochotona wrote: S&P500 study

sell signal: -20% from peak
buy signal:  price crosses 300 day SMA, evaluate first of the month only

Year                  sell        buy      gain/loss
1957              38.98    43.69    -11%
1962              57.27    66.31    -14%
1966              75.10    86.43    -13%
69-70            85.88    87.47    -2%
73-74            93.90      83.03    +13%
80-82          111.59    118.25    -6%
1987            224.84    272.59  -18%
00-02        1180.16    946.11  +25%
07-09        1436.27  1002.63  +43%

+2% gain over the past 58 years. CAGR 0.03%.

The teaser though... it has worked on the biggest bear markets. But you don't know what kind of bear market you have by the time the sell signal pops up.  :-\
O,

Good post. You just identified the main issue. If you are looking to time the S&P go over to The Motley Fool Mechanical Investing Board and look up "Bear Catchers." There are better methods but for John Q Public Bear Catchers is a good and reasonably easy method to track and follow...and extensively back tested.

Oh, and don't forget to subtract tax effects.
Last edited by Kbg on Sat May 09, 2015 2:20 pm, edited 1 time in total.
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Re: Putting in sell stops below your stock ETFs

Post by barrett » Sat May 09, 2015 7:31 pm

I'm with Tyler on this one. If stocks dropped 20%, I think I'd be buying, not selling. That worked great for me in 2011 and then I waited around for three years for another damn correction. Finally found the PP and I don't think much about stocks at this point. I think the only way buying the dips really kills you is if we get into a Great Depression scenario and you just keep rebalancing into an asset until it has lost most of its value and you've chased the dips all the way to the bottom.
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Re: Putting in sell stops below your stock ETFs

Post by MachineGhost » Sat May 16, 2015 4:32 pm

20% is a huge move for an index.  I wouldn't use a trailing stock that huge on one.  Trendfollowing works much better.

20% not so much on an individual stock.

Use a 25% close only trailing stop.  It is remarkably robust.
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Re: Putting in sell stops below your stock ETFs

Post by ochotona » Sat May 16, 2015 4:51 pm

I took my stops off.
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Re: Putting in sell stops below your stock ETFs

Post by mathjak107 » Sat Jun 27, 2015 5:15 pm

here is the problem when trying to dodge the bullet.

you have to be a nervous nellie type to bail before things deteriorate ,especially while new highs are stuill being hit.

but to buy back in when it looks like we are headed to hell takes nerves of steel .

rarely does one person have both properties.
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Re: Putting in sell stops below your stock ETFs

Post by buddtholomew » Sat Jun 27, 2015 5:59 pm

mathjak107 wrote: here is the problem when trying to dodge the bullet.

you have to be a nervous nellie type to bail before things deteriorate ,especially while new highs are stuill being hit.

but to buy back in when it looks like we are headed to hell takes nerves of steel .

rarely does one person have both properties.
In other words, you have to be lucky twice. Once when you sell and again when you buy to circumvent any losses.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: Putting in sell stops below your stock ETFs

Post by Matthew19 » Tue Aug 04, 2015 10:36 pm

Sounds like speculation to me. Do this in the VP. When your 20% stop hits, short the index as a full or partial hedge inside the VP and cover when your ready.
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