Ask Mike:
How often are stop loss settings changed?

Question:

Hello Mike,

I received a stop limits update bulletin today applicable for the Market Trend Portfolio only. Are those updated for the ETF, Stock & Option and Market Trend, as well, when warranted? I guess if I subscribe to the Stock Ratings and, for example, pick the Strong Buy stocks in a strong up-trending market, I'll be on my own to set limits in between the weekly updates. Is this true? Any advice on how I can determine these intra-week stop loss calculations?

Thanks,

Ben

Mike's Response:

Hi Ben,

Using stops on our holdings in our portfolios is an essential key to protecting down-side losses and capturing unrealized gains.

Stop loss settings are derived from one, or a combination of the following:

1. Initial stop losses (the stop loss for a new position in the portfolio) are calculated from a formula very similar to the Black-Shoales formula. It utilizes the past 12 months of volatility in a stock's price and time. From this formula, we can estimate the amount of movement a stock is likely (within one standard deviation) to have in its pricing for the upcoming week. We call this the stock's 'Expected Move'. We set our initial stop loss at 1 penny below this expected move.
2. Once we have held a stock for a while and it has moved up in price, we begin to accumulate paper profits. Our objective is to hold onto a stock as long as it continues to move up in price and get out of that stock when we believe it has started a new downward trend. The key, of course, is to be able to determine the difference between normal volatility and a true trend reversal. Part of how we determine if a stock is likely to move into a downward trend, is by watching the trend of the stock's Sector and Industry. As we accumulate more and more paper profits in a position, our modeling software begins to look more and more at the stock's Industry trend to see if we should get more aggressive with our stop loss setting.
3. And... there are times that we move a stock into what we call our 'Aggressive Stop Loss Strategy', where we move into a strong stance of protecting our paper profits. These decisions are based on a combination of amount of profit held in the position, the direction of the overall market, the volatility of the stock, and the technical analysis of the stock's Sector and Industry.

We generally do not change stops mid-week, but there may be situations that warrant intra-week updates to stop loss settings. We may make intra-week stop loss updates to any of the 3 portfolios.

Keep in mind that Stop Loss settings are updated in the Portfolio Tool for the respective portfolio, only. Changes to stop loss settings are NOT changed in the Ratings or Analyzer database until the weekend update.

Also, the Stop Loss calculation for the Stock and Option Portfolio is not the same as the other two portfolios, so if a stock is carried in the Stock and Option Portfolio, AND in another portfolio, do not expect the Stop Loss to be the same.

Best regards,

Mike