Our Stop-Loss Calculating Tool
The Stops "tool," enables an investor to draw a line in the sand that says, "I will accept this much loss but no more." The tool incorporates a wide range of stop loss strategies, including some highly esteemed strategies that are based on the stocks own volatility. The Stops tool makes it easy to know how to ratchet the stop loss up to higher levels as the stock rises, all the time factoring in the volatility of the stock. No math is needed. The tool automatically calculates the volatility of the stock and generates stop-loss settings for you. The Stops tool has a "lab" where you can experiment with various settings and watch the effect your changes make. That way, you can discover which settings work best for you. Then you enter the settings you prefer and let Stops do all the calculating for you. The Stops tool also supports a more disciplined approach to trading and investing because it helps eliminate emotion from the sell-decision process. What follows is a description of Stops.
A Sample Stops PageStops is our software tool for calculating the changing stop-loss settings of a rising stock. One problem traders and investors face is how to determine where to place a stop-loss. How much should a stock be allowed to decline before selling. Our Stops tool addresses this issue. The ideal stop-loss setting will minimize the loss if the stock plummets but still give the stock room for normal fluctuations while it continues to climb. Correct stop loss placement is one of the most important disciplines an investor can learn.
Stops includes a "Stop-Lab" where you can experiment with different stop loss settings and see the effect of those settings on a stock-chart covering over 5½ years of price activity. Stop loss placement is indicated by a red line that changes as settings are changed. Increasing the multiplier will move the red line farther away from the price action. A smaller multiplier will move the red line closer to the multiplier. In the "LAb," the stop loss follows the stock as it rises and falls. From any theoretical “buy” point, you trace the progress of the red line relative to the price action of the stock. The stop will be triggered whenever the stock’s low price falls below the highest price reached by the red line since the theoretical buy point. To avoid having a position sold because of an intra-day spike, some investors use “mental stops.” They wait to see if the closing price is below the stop line because they believe that where a stock closes is more important than what it does during the day. In the lab you can study how your settings influence end-of-day stops by simply noting whether the stock’s closing price on the day of a decline is below the highest point reached by the red line. The charts in the lab were pre-selected by StockDisciplines.com and cannot be changed. When you determine the settings for the kind of stop losses that work the best for you, those settings can be entered for each of 10 different stocks. Or, you can enter a different stop loss setting for each stock. Stops will then automatically compute your stop-losses for you as you enter price data.
Stop-losses can be based on a fixed-percentage decline or on the volatility of the stock. You can also generate stop losses that combine the fixed-percentage and volatility-adjusted approaches. The tool can calculate and use volatility measurements to reduce the chances of unnecessarily triggering the stop loss because of random lurches of the stock. It includes 19 different strategies you can use to calculate a stop loss, each of which has an infinite range of adjustment possibilities (so you can adjust them to reflect your own tolerance for risk). It will use average deviations, standard deviations, and "true range" equations derived from the work and thinking of Kase, and others. Stops does all the math for you.
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 strategy 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. Calculating the stop loss helps a person define when a stock has started to decline.
The ideal stop loss will minimize the loss if the stock plummets. On the other hand, it will also give the stock room for normal fluctuations while it continues to climb. Placing the stop loss too close to the stock will cause an unnecessary sale. Placing the stop loss too far away will result in too much loss if it is triggered. That’s why the volatility of the stock should be calculated and factored into the computation of the stop loss. Again, most of the better stop-loss strategies factor in the volatility of the stock.
When we were teaching others about trading and longer-term investing, we learned that most people do not know how to compute that kind of stop loss. If they use stop losses at all, they tend to use rather simplistic stop losses that do not factor in the volatility of the stock. Therefore, their stop losses tend to be triggered too quickly because they are too close to the stock or too late because they are too far from it. Most investors are not be able to make the necessary volatility-adjusted stop loss computations on their own. Even those who have the mathematical know-how to make the necessary computations would find it too tedious and time-consuming to repeatedly compute volatility-adjusted stop losses for all their positions as they work their way up to higher levels.
Understandably, traders and investors would much rather spend the time searching for attractive "setups" or planning their next move. Unfortunately, the use of "sloppy stop-losses" explains why so many people get much lower performance from their portfolio than they should, and the fact that so many use no stop loss at all explains why so many get "killed" in the market. Adopting a habit of always using correctly placed volatility-adjusted stop losses could add an extra 10% or more to the return of a portfolio. Investors need to be able to determine optimum stop loss placements without having to make time-consuming statistical calculations.
There are stock-charting programs available that will automatically do the stop loss computions, but those programs tend to be very expensive and users must still write the equations. Also, most of those programs require that a special syntax unique to the program be used in constructing formulas. One person I know has done graduate-level work in applied mathematics. After four years of experience with one of these programs, he still has not been able to determine how to write the simplest stop loss formula so that the program will use it correctly. The math is easy for him. He just hasn’t been able to spend the time it would take to figure out how to express his equations in the peculiar syntax necessary for the program to behave correctly. The producers of the program expect their customers to help each other figure out the syntax by using a Web-based forum to share what they’ve learned through trial and error. These users have learned not to expect much help from the software company.
The Stops SolutionInvestors do not want to spend their time studying program syntax and non-intuitive procedures, 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 19 different ways to compute a stop loss and each of these can be infinitely adjusted by the user. All you have to do is enter a few numbers ("1," "2," or "3") to control the way stop losses are computed. For example, entering "1" in one box might tell Stops to use a particular procedure to measure volatility, entering "3" in another box will tell it to subtract whatever percentage you choose from the highest high, low, or close (according to your selection), and so on. As previously mentioned, Stops includes a Stop-Lab where you can experiment with different settings and see the effect of those setting changes on the stop loss on a stock-chart covering over 5½ years of price activity. Stop-loss placement is indicated by a red line that changes as settings are changed. Stops can be based on a fixed-percentage decline or on the recent price action and volatility of the stock. Volatility-adjusted stop losses use volatility measurements in an effort to avoid unnecessary selling because of random lurches of the stock.
You can also generate stop losses that combine the strategy of a fixed-percentage stop loss with that of a volatility-adjusted stop loss. You can even select the relative weighting that each strategy will have on the final stop loss output. Furthermore, you can control the amount of influence the volatility measurement (such as the standard deviation, average deviation, etc.) will have on the stop loss. Stop losses can be computed relative to the high, low, or close. Rising stop losses are automatically computed for you as stocks rise (for up to 10 positions). Once a few simple settings are made, all you have to do is enter data for each day. This data consists of the date, open, high, low, and close. That’s all there is to it. The stop losses are automatically computed and displayed as data is entered.You can even enter the high and low prices of a move to have Stops calculate Fibonacci retracement levels for you (traders often make use of them in placing a stop loss). Fibonacci ratios appear throughout nature. They appear in branching plants as they grow, in the number of petals on flowers (lilies, irises, buttercups, etc.), starfish, sand dollars, the shell of a chambered nautilus, snail shells, sea horses, the horns of some animals, and in the proportions of the human body. Elliot Wave Theory makes use of them in stock market trend analysis in which five upward waves and three downward waves form a complete cycle of eight waves. All of these numbers are Fibonacci numbers, and these relationships can be applied to both short-term and long-term trends. Many traders use the Fibonacci relationships in stock behavior patterns to find areas of support and resistance and to find a good place to put the stop loss. They will often wait until a stock reaches its Fibonacci support level, buy as soon as the stock responds to that support, and then place their stop loss immediately below the Fibonacci support. This is a low-risk purchase because the stock is bought just above the stop-loss.
Why spend over a $1000 for a program that will calculate stop losses (if you can write the equations) plus a few hundred dollars in annual fees to pay for "support" (but probably not support in writing those equations)? With Stops, if you need help with your set-up or with spreadsheet procedures, simply call and ask for it. Support is provided free of charge by a people whose native language is English. While we will not accept collect calls, we will talk to you without charging you for the "privilege."
Read the License Agreement for details before placing an order. Better stop loss placements throughout the year can easily translate into far more in profits and savings than the price of using Stops. Even one well-placed stop loss might save far more than the fee for a year.