It seems that more and more traders are encouraged to use stop-loss orders (SLO) in their trades (if long) ostensibly to limit large and sudden losses. It is often used where daily monitoring of the market is not possible and set at such level where the loss would be acceptable. For instance, at 10-15% below either current or bought price.
However, by instituting such a strategy for a portfolio, it automatically locks in the losses (though may still be at a profit) during volatile markets, even though the price trend is in your favor. Meaning that though a stock still has upward momentum and has the same positive favorability as when you originally bought it, you force a sell during temporary market panics.
A SLO regiment, which favors minimizing losses over maximizing returns, may in the long run significantly reduce your total, absolute return.
Great stocks during the past decade like Cisco and Dell, even after accounting for the recent bust have returned many thousands of percent since 1990 (25K and 55K, respectively). During each year and even over several weeks the stocks (and many others) have dipped over 10-15% from their previous highs, only to move higher thereafter.
A SLO would have sold those stocks very early on during the run, and then you'd have to re-enter the market to buy them again, sometimes at a higher price. I am not saying that one should just be a Foolish Buy-and-Holder (pun intended), but I am arguing against an equally dumb strategy that prevents you from letting your winners run because you are fearful of a losing position.
Is there better way to decide when to sell, especially if you are not a daily trader?
However, by instituting such a strategy for a portfolio, it automatically locks in the losses (though may still be at a profit) during volatile markets, even though the price trend is in your favor. Meaning that though a stock still has upward momentum and has the same positive favorability as when you originally bought it, you force a sell during temporary market panics.
A SLO regiment, which favors minimizing losses over maximizing returns, may in the long run significantly reduce your total, absolute return.
Great stocks during the past decade like Cisco and Dell, even after accounting for the recent bust have returned many thousands of percent since 1990 (25K and 55K, respectively). During each year and even over several weeks the stocks (and many others) have dipped over 10-15% from their previous highs, only to move higher thereafter.
A SLO would have sold those stocks very early on during the run, and then you'd have to re-enter the market to buy them again, sometimes at a higher price. I am not saying that one should just be a Foolish Buy-and-Holder (pun intended), but I am arguing against an equally dumb strategy that prevents you from letting your winners run because you are fearful of a losing position.
Is there better way to decide when to sell, especially if you are not a daily trader?
