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The Stops tool makes it easier to know where to place each higher stop loss as the stock rises, while simultaneously factoring in the volatility of the stock. No math is needed. The tool automatically incorporates a stock’s volatility in its calculations, using your choice of method, and provides the needed stop loss data as determined by the stock’s own behavior. The Stops tool facilitates a disciplined approach to trading and investing. It helps eliminate emotion from the sell-decision.
One problem traders and investors face is how much to let a stock decline before selling. Our tool addresses this issue. The ideal sell strategy will minimize the loss if the stock plummets but still give the stock room for normal fluctuations while it continues to climb. Correct sell order placement is one of the most important disciplines a trader can learn. The problen is that in order to determine the correct placement of a volatility-adjusted stop-loss, it is generally necessary to use some math. The Stops tool makes the calculations automatic. With this tool, stop losses can be computed on the basis of either of two very different approaches to stop loss computations. Each of these approaches has a virtually unlimited range of adjustment possibilities (so you can adjust them to reflect your own tolerance for risk). This is possible because a weighting factor can be applied to the volatility measurement. The weighting factor can be any positive number or decimal (to as many decimal places as you like), enabling the user to "fine tune" his stop loss settings. Stops does all the math for you. All you have to do is tell it what you want.
Stop losses based on volatility measurements are much less likely to be triggered by a random fluctuation in price. Most expert traders and investors will use direct measures of a stock's volatility in the placement of their stop losses. A very popular method for computing volatility is to compute the ATR (the Average True Range). An alternative for measuring volatility that also has strong support from statisticians is the computation of the standard deviation of price movement. Traders and investors have learned that the standard deviation is an accurate and powerful tool for setting stop losses. Stops provides a means by which you can use either approach without having to perform the calculations. Below, we will discuss each procedure.
General description: The Stop Loss
Whether a person holds stocks for a few days or for many months, he must make trades. One of the rules of good trading, and of good investing in general, is to "limit your losses and let your profits run." This phrase is often heard in investment circles, but it is not often implemented with discipline. It’s another way of saying that, for the best returns, a person should hold onto a stock only as long as it is climbing and sell quickly when it starts to decline. The use of a stop loss order that follows a stock up as it climbs higher and automatically sells when the stock falls is one of the best strategies known for doing precisely that. It is also the easiest to implement. Because Stops makes the computations automatic, you can spend your time on other parts of your strategy or on refining your discipline. Stops relieves you from the stress of determining where to place your sell order each time the stock ratchets up to a higher level.
The Stops Solution
Traders do not want to spend their time studying program syntax and non-intuitive procedures that do not follow the standard rules of algebra, and we have found no inexpensive easy-to-use tool we could recommend that will automatically do the math required to compute a sophisticated stop loss. So, we developed one. We call it Stops. Stops is based on and makes use of an Excel spreadsheet. It provides two very different ways to compute a stop loss and each of these can be "fine-tuned" to reflect the user's tolerance for risk. All you have to do is enter a few letters ("H," "L," or "C") in cell C-1 to indicate that you want your stop loss calculated relative to the high, low, or close. For ATR calculations, you would enter "5," "7," "14," or "20," in cell C-2 to indicate that you want your stop loss calculated on the basis of the last 5 days, 7 days, 14 days or 20 days. You would enter a number (usually between 1.000 and 4.000 in cell C-3 to "weight" the volatility measurement (volatility x 1.58, volatility x 3.25, etc.).
As you can see in the above illustration, the user can enter a stock's symbol in cell D-1, and the desired data will appear in the blue area. Alternatively, he can simply scroll down the list to find the stocks of interest. All stocks on the list will show data generated by the settings entered by the user.
In the Goldenrod colored strips, you will see "Price," "VA," "Price-VA," and "Price + VA." The letters "VA" stand for "Volatility Adjustment." If a stock has been in a downtrend and an investor is wanting to determine when a reversal has taken place, he might want to calculate a buy price by using a multiple of the volatility measurement. Instead of calculating the price for a stop order to sell, he may want to calculate a price for a stop order to buy. Also, there are times when short sellers will want to add the VA rather than subtract it. Under these conditions, the user will be interested in the data under "Price + VA." Those who use the tool only for calculating stop loss prices for long positions will focus on the "Price - VA" column.The above illustration shows the tool configured for ATR stop losses. These are Stops based on Wilder's original formulas for Average True Range. Stops does not modify Wilder's methodologies or use shortcuts. It uses his procedures of calculation as he intended. Note the gray box in cell G-19. If the user enters an "S" in that box, Stops will re-configure itself to generate data based on the standard deviation.
With the "S" in cell C-19, Stops will ignore any entries in cell C-2. All computations for the standard deviation will be based on 20 days of price activity.
Stops will also show you the data used in computing stops. When the user scrolls to the right, he can view the following data.
The user can see the ATR for the 5-day, 7-day, 14-day, and 20-day periods for all the stocks in the Stops database. He can also see the standard deviation of the Wilder True Range and the latest computation of the Tue Rnge.
Stops is intended for people who do not want to spend a lot of time making mathematical calculations or who do not want to pay a large fee to use a program that probably will not make it any easier to compute a good stop loss. Even with very expensive software, either because of the strange non-intuitive syntax required by the program or because of the lack of sufficient mathematical expertise on the user’s part, it is often very difficult for most users to write a volatility-adjusted stop-loss formula that the program will use correctly. That is why so many investors rely on "eyeballing" charts (this can be quite sloppy and result in more than necessary loss) or on making simplistic computations manually. Manual calculations have to be very rudimentary because the more sophisticated computations tend to be too time-consuming.
Most successful investors prefer to place their stop loss just below a recent minor low. A minor low suggests that there is support at that level. An alternative approach is to place it under a significant trendline. However, there are times when the trader can find no recent minor lows or trendlines to use as a reference. At such times, a "mathematical stop loss" can be very useful. Stops can make computations that are based on statistical probabilities. For example, in a normally distributed population, measurements that are 2 standard deviations above the average (you don’t have to know what this means) occur about 2% of the time. That is, in any random sampling of 100 people, the probability is that 2 of them will score at that level (whether it is height, weight, IQ, strength, or whatever). Similarly, 2.5 standard deviations represent a frequency of occurrence of about 6 times out of 1000, and 3 standard deviations represent a frequency of 1.3 times out of 1000.
ATR Stop Losses
The True range is defined as the greatest the following:
The Average True Range (ATR) is the average of the True Range over a given period. It is a measure of volatility first introduced by J. Welles Wilder in his book, New Concepts in Technical Trading Systems. Wilder recommended a 14-day average of the True Range. (Periods ranging from 5 to 21 days have been recommended, depending on the nature of the security traded and the anticipated holding period.) According to Wilder, large ATR values tend to occur at market bottoms after a panic sell-off (volatility is high). Small Average True Range values tend to occur when volatility is low. An example would be during times of prolonged sideways movement (as when a market is topping out or undergoing consolidation).
Stocks will sometimes gap up or down. A volatility formula based only on the high-low range would not accurately capture volatility when gaps occur. Wilder's Average True Range can capture this “missing” volatility because his True Range automatically factors in any gaps. The Average True Range measures how much fluctuation or "noise" there is in a trending stock's behavior. If a person wants to place his stop loss outside this envelope of noise, then he will multiply the ATR by a factor greater than 1. For example, he may multiply the ATR by 1.5 and use the result to calculate his stop. This would help prevent getting stopped out prematurely and will also limit his risk in the trade. Some will prefer a stop that is a greater distance outside the noise envelope and multiply the ATR by a number greater than 1.5. Wilder recommended a multiplier of 3 for intermediate-term to long-term investors. The choice of a multiplier is an individual matter that should be based on the individuals investment time horizon and tolerance for risk. Since there is never a guarantee that a declining stock will recover, the more a stock is allowed to decline, the greater the risk assumed by the investor. This risk must be balanced by the desire to avoid selling too quickly and without sufficient reason. These considerations cannot be made for you. However, lower on this page, we have provided some charts showing where the stop loss would be for various settings.
Wilder's Average True Range was not computed by simply adding up the True Ranges for 14 days and then dividing by 14. He has a unique method of averaging. Stops uses the same unique methodology recommended by Wilder. Many who attempt to use Wilder's system do not perform the calculations correctly. However, Wilder's methodology has become a favorite among investors and traders who know how to perform the calculations correctly, because of its effectiveness and relative simplicity.
Standard Deviation Stop Losses
Wilder devised his concept of the Average True Range at a time when people did not have personal computers to handle more complex equations. However, the standard deviation is the statistical tool used by statisticians in their measurements of variance. They consider it to be superior to any procedure based on averaging. Stops enables the user to choose the standard deviation to determine statistically valid stop-loss levels. In the opinion of most statisticians the standard deviation is the best and most statistically valid measurement of variance available (for shares, "variance" relates to the magnitude of price excursion).
It is a fact of nature, like Pi (π) is the same regardless of the size of a circle, that whenever we measure a randomly selected group for some trait which each member of the group possesses in varying degree, we may expect most of the measurements to bunch around the average, while the remainder taper off gradually toward both extremes of the distribution forming a bell-shaped curve. That is, the more extreme the measurements (extremely small or extremely large) the less frequently they occur. If you plot a bell-shaped curve, most measurements will be grouped near the center. The more people there are that are "normal," the larger the group at the center. There are many more men who are 6' tall than who are 7'2" or 3'5." By using the standard deviation as a measure of variance, we can know the probability of finding trait measurements of any magnitude.
For example, in any large normally distributed set of trait measurements we know that trait measurements that are ½ standard deviation or more greater than the average (B in the chart) will occur 30.85% of the time. Again, this is a law of nature. Similarly, we know that
Our stockdisciplines.com traders use this information to approximate the probability of the occurrence of a price spike of a specific magnitude (as represented by its distance from the norm in standard deviations). You can do the same thing. The word "approximate" is used because stock price variations are not exactly "normally" distributed, but they are close enough for our purposes. Assume for a moment that stock price spikes precisely followed a "normal" distribution or bell curve. Then a stop that is set at 1.5 standard deviations from the average price would be triggered approximately 6.68% of the time. Assume that during the last 20 days there were no special news events that inordinately influenced the stock and that the same conditions prevailed over the next 100 days. In that case, spikes large enough to trigger a stop set at 1.5 standard deviations would probably occur about 6.68 times in 100 days or about once every 15 days simply because of the normal volatility or "noise" in the stock’s behavior. If we use 2 standard deviations, then a spike large enough to trigger the stop would occur about once every 50 days. For a more complete discussion of Standard Deviation and its application, see Stop Loss Probabilities
Because Wilder's True range effectively compensates for gaps over the shortest period possible, Stops Uses Wilder's True Range as its basic analysis unit rather than the range over one or two days. Some use two days and add a day when gaps occur, but in our view this is a coarser approach (lacking the definition) of using Wilder's True Range. Stops calculates the standard deviation of the True Range over a 20-day period and adds it to the Average True Range. The Formula is ATR + (f x StDev) where f is the multiplier or weighting that is applied to the standard deviation. The result is added to or substracted from the high, low, or close.
This tool is probably the easiest tool available anywhere for calculating stop losses based on the standard deviation. It is so simple to use that a User's Guide is not necessary. All explanations needed are included on this page.
Because it is difficult to visualize the probable real-life experience of setting a stop loss at any standard deviation multiple, we have some charts below where you can see a red stop loss line below a stock's price action. The charts show how various multipliers determing stop loss placement.
Stop Loss Placement
To give you an indication of the effect of different multipliers on stop loss placement, we have found a stock with numerous reversals to illustrate the point. Below are five charts showing a stop loss relative to the closing price each day (red line). They show stop losses calculated by multiplying the ATR by 1, 2, 3, 4, and 5, respectively. At the time we made these charts, we did not have the standard deviation calculator in its present form, so we did not generate charts for this procedure. However, you can make use of the charts in estimating the multiplier you want to use for standard deviation stops. For example, in one test we found the ATR stop adjustment for a multiplier of 3 was 4.09 points. With similar settings, the standard deviation stop adjustment was 3.95 points. Changing the standard deviation multiplier to 3.15 gave a stop adjustment of 4.09, making it identical to the ATR stop loss. The two approaches may not always be so similar in their results. However, the point here is only that the charts can be useful when using either approach.
In using the charts below, imagine you have bought at any place on one of the charts. The red line directly below the price bar on the day of purchase represents your stop loss on the purchase date. As the stock rises, you adjust your stop loss accordingly, using your chosen multiplier and the ATR for the current day. Eventually, the stock will decline. When it drops enough that it reaches the level of the highest point reached by the red line since your purchase, the stop loss is triggered and the stock is sold. Most people place the stop order to sell with their broker so that they do not have to monitor the stock during the day. Then, in the evening, they adjust the stop loss for the next day. However, those who are concerned that intraday volatility will unnecessarily trigger a stop, will use "mental" stops, and wait to see where a stock closes. If it closes below the computed stop loss, they call their broker and place a sell order.
In the following illustrations, the red line rises and falls with the stock. In actual practice, stop losses should only be raised as the stock rises. They should never be lowered. It is always at the highest level reached since purchase. When the stock declines, the stop loss does not. However, if we did that with the illustrations, the red line would go flat or disappear the first time the stop is triggered. This way, you can imagine buying at any point on the charts.
1 x ATR
2 x ATR
3 x ATR
4 x ATR
Changes In Our Stop Loss Calculator
Our previous stop loss calculators required that the individual enter data every day for each position. This data consisted of the date, open, high, low, and close. Entering that data or downloading it is time-consuming. The new Stops already has that data, and it is updated daily. All the user has to do is go to the "Subscriber Section" and download the updated spreadsheet. It takes less time to download the spreadsheet than it would take to download the data. That’s all there is to it.
Our previous stop loss programs based on Excel had to protect against hacking and piracy because they incorporated our proprietary formulas and procedures. For protection, we had to use strong encryption or other techniques. We also removed the menu (command ribbon) as well as the column and row headings. In addition, we had to prevent access to the macro (VBA) code. The new Stops tool does not require any of these protections. The user has full use of Excel's menus and headings.
Because we could not remotely turn off our previous stop loss programs, they had to be pre-programmed to turn themselves off after six months or a year. That means the user had to keep renewing a license at the end of each license period in order to keep using the tool. That is no longer necessary. The new Stops is available like any of our other subscriptions, and the fees are charged in the same way. A person is not "locked-in" for six months or a year.
Stops will calculate volatility-based stop losses in reference to the stock's high, low, or close. To "tell" Stops which approach you want to use, simply enter "H," "L," or "C" in cell C-1.
Stops can calculate ATR stop losses based on the most recent 5 days, 7 days, 14 days or 21 days. Just enter your chosen time period into cell C-2. It can also calculate stop losses based on the 20-day standard deviation of the stock's price activity.
You can "weight" the ATR or standard deviation by using a multiplier. In Stops, the multiplier does not have to be an integer. For example, 1.35, 2, 2.46, 3, 1.9, and .82 could all be acceptable entries for cell C-3.
When you enter your settings for calculating the stop loss, the calculation will be applied to all stocks in your downloaded spreadsheet. Since it is highly probable that all stocks in your portfolio are included in this database, your chosen parameters will likely be applied simultaneously to all the stocks in your portfolio.
You can then scroll up or down to find the stop loss setting for each of your stocks.
However, it is not necessary to scroll. For example, you may enter a stock's symbol in cell D-1. The settings for that stock will appear in the light blue strip in rows 6 and 7. If nothing appears, it means the symbol entered is not recognized by the calculator. Scroll down, find the stock, and note the symbol used by the calculator. Enter that symbol, and the data will appear in the blue strip. The calculator sometimes requires an extender. For example, it will require the symbol for Intel to be entered as INTC.O rather than as simply INTC. The ".O" means it is listed on the Nasdaq. Sometimes the calculator requires a ".K" (for some, but not all, NYSE listed stocks). For example, a stock with a 4-letter symbol that is listed on the NYSE would require a ".K" extender, but stocks like IBM do not usually require an extender. "Pink Sheet" stocks require a ".PK" extender.
Each day, before you download Stops, check the "Stock Market Review" page of our site to see what date is posted in the first paragraph of our comments. That is the date of the data currently being used by Stops. Alternatively, check cell C-4 of the calculator. The data used by the calculator was accumulated after the close of market on the date posted in cell C-4.
This tool is extremely easy to operate. It is fast, and it does the calculating for you. To use Stops, you must be able to open and use an Excel 2003 spreadsheet. We use the older version of Excel so that people with older versions of Excel can use the tool. Those with later versions of Excel should also be able to use the older spreadsheets. Older versions of Excel cannot work with spreadsheets created in the newer formats of the latest versions of Excel.
The use of Stops for a year costs less than the price of a subscription to the average stock market newsletter. The average market letter consists of 8 to 12 pages of opinion. On January 22, 2001, Money magazine reported on a survey it made of 61 market letters. The average annual subscription price for these newsletters was $220.46. We have not checked lately, but we are sure prices have gone up considerably since then. A simple cost of living adjustment through June of 2017 would increase the price to $308.41. Another way to look at it is that an adult could buy two regular 1-day tickets to Disneyland for $220.00. The price of using Stops for 6 months is only $150. The money spent for two tickets to Disneyland pays for a few rides and maybe a few moments of pleasure. The money spent on Stops is spent to enhance assets. Better stop loss placements can easily translate into far more in profits and savings than the price of using the calculator. A few well-placed stop losses could save many times the cost for a year of use (and pay for many trips to Disneyland).
To download a small Excel 2003 test spreadsheet, click on
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