Stop Losses on Pennies...

[JayTee]

Hi guys, I was wondering how you all approach the subject of stop losses?

From looking around the forum it appears that most of us here at least dabble in the penny stock game, and from my limited experience paper trading over the last year or so, positioning your stops just right in a market this volatile is near impossible!

I initially thought "let's set a real close stop, say 2%, to minimise losses". Looking at the bulletin board stocks, profits of 20% aren't unusual, so you can get stopped out 10 times for each 20% profit and still break even. With some careful purchases you're sure to beat that right? Ha!

Even if you pick the right ones here, the chances of the stock opening down 20% the following morning and instantly stopping out at a loss, or a potential profit being stopped out by a quick drop in price before it rises again happen far to frequently for my liking.

Then I looked at larger stops, using fibonacci to calculate where a 2/3rds retracement would pull back to and setting just under here. The problem with this is that 2 stop outs and over half your starting cash has gone!!! You then need a whole loada good picks to clamber your way back up to the starting line...

Obviously getting the risk vs reward ratio is key, so I was wondering how the more experienced members of SMC set their stops? Do you use a combination of stops? 5% initially and then trailing behind the 5-day MA for example? How about range based stops? Or is it a question of judgement depending on each chart?

I realise everyone takes some losses on the way, but I seem to be stuck between constantly stopping out with short stops or knocking myself out of the game with big stops.....

[Skydaemon]

"Or is it a question of judgement depending on each chart?"

Check. At least in my case. It's not always based on a chart either, it's any "violation of trade rules" or "when my trade has become broken, or has become questionable about it's ability to complete".

I am reasonably attentive with my stocks and I don't use stops and exit manually. Partially because I don't want to get jerked around, and partially because I don't want to tip my hand to the brokers. I don't see any reason to give them info they can use against me, not that I really expect them to.

I have no set amount to lose. I can get out while in profits, or losses, it's whatever the best short term price I can get is around when I have decided my trade is broken and I need to get out.

Usually I have timeframes, and a definition in mind of what should happen, what is allowable to happen, and what cannot happen and what I'm expecting in terms of news or related things like commodities or whatever. I will sometimes ignore minor violations if it looks like an accident, if it seems to stick I'm gone. If what I was waiting for gets taken away (a news release gets pushed way out or something), I pick a good price and leave.

If my play is broken I judge the intraday price action and get out with the best price I can asap, profit or loss doesn't matter to me at that point, although my trade plans rarely allow for huge losses unless there are strong fundamental reasons and I'm very confident in it.

For example, I had an oil related stock today GTE that I exited prematurely. I did so because oil trades in $10 ranges, and for a minute it broke down to the lower range (which implies up to a $10 fall in the price of oil and a large drop in my stock because my stock moves with oil). My "not allowed to happen" happened, and I left immediately. It very likely might even recover, but at this point the play has turned from a good reward play into an uncertain timebomb. My reason for continuing to own it was that I was waiting to take profits until oil hit around $148-$149 ish. When it crossed beneath $140 it threw that in doubt, and it also opened up downside to $131. That's like a double violation, so I was out, didn't even care about the chart. Oil is back up in the $140+ range, but that's ok, it broke my rule and it's time for the next play.

[JayTee]

Hi Skydaemon, thanks for your reply!

Looking at what you've said here, it seems like you set quite tight personal stops just outside your trading rules, for example, with GTE you've spotted a ten dollar channel. As soon as the price broke outside of that channel you closed the trade, rather than having a stop 5 or 10% outside this range to allow the price to return.

I'd love to have the time to watch stocks closely and have the personal discipline required to be able judge the right time to get out, although truth be known, I think I need automated stops to prevent my over-eager side doing things I shouldn't! I have a weakness for hoping that a price will go back up , automated stops save me from myself!

[Skydaemon]

Try to get in the habit of not saying you think it's going up or down. Think of it in percentage terms. It helps me anyway.

This is 80% likely to go up, and 20% likely to go down.

If it goes up the likely gain is 45%, if it goes down the likely loss is 10%.

If you start expressing yourself like that it makes it much easier to pull the plug on losers.

And then when choosing stocks, your path to better kept profits involves making these ratios better in your favor.

[BadThad]

I never use them on the penny stocks.....but I generally avoid pennies.....so I'm not the best for advice on them.

For my big board and mid-cap trades, I don't mind "tipping my hand". What Sky says is true, I've been burned by showing my cards quite a few times. Sometimes they dip the PPS down, swipe your shares and then shoot it right back up (what I call a "swoop"). It's amazing, I would think it's just chance, but it's happened to me so many times over the years, there's no way....it's a calculated move by the broker/marketmaker to steal away my shares.

I mostly use "stops", or what I prefer to call "triggers", to control my fate. I don't use it on every trade, but I do use triggers on most trades. For the first few days, IMO, it's best to manually watch what's going on. Playing the market involves a lot of "feel", i.e. market sentiment, latest news, industry trends.....I prefer to leave that in my hands! Once the stock seems to have settled in, I'll place my first trigger as a stop loss. Just in case everything goes to crap, I'm willing to lose only so much....nothing sucks worse than being away from your PC while your stock takes a major crap on you!!! On a stock that's running up, I'll keep raising my trigger higher and higher to lock in my profit. I think that's important, more so than a "stop loss". I keep my profit trigger a good bit lower than the "last" price so I don't get "swooped" and I don't get upset when it hits because it's a guaranteed profit.

[sg1efc]

Cool info everyone, Thanks!

[Ray The Money Man]

Originally Posted by BadThad

I never use them on the penny stocks.....but I generally avoid pennies.....so I'm not the best for advice on them.

For my big board and mid-cap trades, I don't mind "tipping my hand". What Sky says is true, I've been burned by showing my cards quite a few times. Sometimes they dip the PPS down, swipe your shares and then shoot it right back up (what I call a "swoop"). It's amazing, I would think it's just chance, but it's happened to me so many times over the years, there's no way....it's a calculated move by the broker/marketmaker to steal away my shares.

I mostly use "stops", or what I prefer to call "triggers", to control my fate. I don't use it on every trade, but I do use triggers on most trades. For the first few days, IMO, it's best to manually watch what's going on. Playing the market involves a lot of "feel", i.e. market sentiment, latest news, industry trends.....I prefer to leave that in my hands! Once the stock seems to have settled in, I'll place my first trigger as a stop loss. Just in case everything goes to crap, I'm willing to lose only so much....nothing sucks worse than being away from your PC while your stock takes a major crap on you!!! On a stock that's running up, I'll keep raising my trigger higher and higher to lock in my profit. I think that's important, more so than a "stop loss". I keep my profit trigger a good bit lower than the "last" price so I don't get "swooped" and I don't get upset when it hits because it's a guaranteed profit.

Great advice here from BadThad, generally you should just stay away from penny stocks. Just because a stock is cheap doesn't mean it is a good value. Some of the best advice I can give you is do not trade a stock that trades for less than $10.00 and trades less than 250,000 shares a day. Anything less, and the bottom can fall out from under you in the matter of minutes.

[greencat]

In penny stocks you have to plan the trade and trade the plan.

Mental stop losses. Usually after it breaks support.

The big difference in trading pennies over big board stocks is: Big board stocks can be more forgiving over time especially if it has good fundies.

Penny stocks are not forgiving and usually the fundies are hyperbole.

Penny stocks are strictly for short term traders.