Stop orders could be a good safety measure to protect from a sudden crash. They've become more and more appealing as valuations have rapidly increased and, well, easy come easy go... But how safe are stop orders?
I would feel very safe with a stop order say 5% or 10% below current prices if I knew it would execute right at or close to that price. The risk is that if trading volume is low enough and there's a rapid crash, my order could execute significantly below my intended price. I think I would be safe for the small amounts I would apply stop losses to, say 1000 shares of a popular Vanguard ETF. Even big crashes typically take many trading days to lose double digit percentage points with large trading volume, so my modest stop orders should be safe, right?
I'm guessing historically the worst time to try using stop orders would have been the crash of Oct 19th 1987. Would the kind of stop order I describe still be safe from slippage on that kind of day?
Of course nowadays the big risk would be a flash crash...
Stop order slippage risk
Re: Stop order slippage risk
I'm not a fan of stop losses.
If it goes down and then back up, you will just have sold low, and will have to buy higher.
One important thing we tend to forget: if you are young and save 50%+, you have to allocate money every month. A lot of it.
I already have the issue of having to buy something at these high valuations, I would not like to find myself in the uncomfortable situation of having even more money to invest somewhere just because the market went down a ridiculously small amount like 5 or 10%.
If you are worried about valuations, build up your cash levels (its what I'm doing, I now have slightly more than 20% of my NW in a CD) so you can buy in case of a big correction/bear market.
Remember to set rules for how you allocate the cash.
For example, I have decided I will allocate 50% of my extra cash if the market falls 30%, and the other 50% when if markets fall 50%
If it goes down and then back up, you will just have sold low, and will have to buy higher.
One important thing we tend to forget: if you are young and save 50%+, you have to allocate money every month. A lot of it.
I already have the issue of having to buy something at these high valuations, I would not like to find myself in the uncomfortable situation of having even more money to invest somewhere just because the market went down a ridiculously small amount like 5 or 10%.
If you are worried about valuations, build up your cash levels (its what I'm doing, I now have slightly more than 20% of my NW in a CD) so you can buy in case of a big correction/bear market.
Remember to set rules for how you allocate the cash.
For example, I have decided I will allocate 50% of my extra cash if the market falls 30%, and the other 50% when if markets fall 50%
Re: Stop order slippage risk
Oh for sure there is whipsaw risk. But the stops would be part of my personal strategy that probably differs at least to some degree from the strategy of everyone else on the forum. I wouldn't expect anyone else reading this to think that stop losses are a good idea - I agree that they shouldn't be used under normal circumstances.
What I'm wondering is if my holdings are only say 0.1% of average daily trading volume of a fund, but my stop order triggers in the middle of a -10% day, how confident can I be that I will succeed in selling within say 1% of my order price? Any way to estimate this, or are there resources to read about historic stop loss problems?
What I'm wondering is if my holdings are only say 0.1% of average daily trading volume of a fund, but my stop order triggers in the middle of a -10% day, how confident can I be that I will succeed in selling within say 1% of my order price? Any way to estimate this, or are there resources to read about historic stop loss problems?
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jacob
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Re: Stop order slippage risk
Your biggest risk for a stop order is a flash crash that triggers the stop and executes your [now turned into a] market order at a ridiculous price point. Forget about average volume... the orderbook during rapid movements look way different (illiquid) than during ordinary trading.
What you want is a "stop limit" order.
What you want is a "stop limit" order.
Re: Stop order slippage risk
Thank you Jacob. I had a misunderstanding about stop-limit vs. just stop orders, but yes stop-limit is what I want!
Re: Stop order slippage risk
Stop-limit order: Protect the downside risk, if price moves against you.
Stop-limit order: Buy if price drops to your order level - "Buy the dip" / "Catching the falling knife"
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I don't think a stop-limit is what you're looking for. I've used s stop-limit successful for many years, to lock in gains. On one particular company, I had set my stop-limit to the 100wk simple moving average. Within the first 3 months or so, my stop-limit was at my original price, so I was effectively break even. Over a period of 5 years, the price increases to far more than I ever imagined. The largest swing trade I ever took!
Jacob is right in that you often won't want to sell when the price dips, but depending on your requirement it might work for you. Two arguably better ways of hedging for downside are:
1. Buy income generative shares that pay dividends (you don't need to worry about the price, if you don't plan to sell - And indeed you may want to buy more at lower prices)
2. Build a position in other investments such as bonds, which do well in a bear market.
Ultimately youre best asking yourself *why* would you want to sell at that point - Is it fear of losing more money? Indeed, look at that in the context - You're guaranteeing a smaller loss of money as payment for this.
I can't answer to slippage on macro investments unfortunately. For daytrading, slippage of a few pips is common. In large market moves, such as interest rate changes, you don't want to be in 'em when they happen.
Personally? I'm weighting more dividend stocks, I would buy more in a market downturn, not set any stops, and review positions monthly.
Stop-limit order: Buy if price drops to your order level - "Buy the dip" / "Catching the falling knife"
.I don't think a stop-limit is what you're looking for. I've used s stop-limit successful for many years, to lock in gains. On one particular company, I had set my stop-limit to the 100wk simple moving average. Within the first 3 months or so, my stop-limit was at my original price, so I was effectively break even. Over a period of 5 years, the price increases to far more than I ever imagined. The largest swing trade I ever took!
Jacob is right in that you often won't want to sell when the price dips, but depending on your requirement it might work for you. Two arguably better ways of hedging for downside are:
1. Buy income generative shares that pay dividends (you don't need to worry about the price, if you don't plan to sell - And indeed you may want to buy more at lower prices)
2. Build a position in other investments such as bonds, which do well in a bear market.
Ultimately youre best asking yourself *why* would you want to sell at that point - Is it fear of losing more money? Indeed, look at that in the context - You're guaranteeing a smaller loss of money as payment for this.
I can't answer to slippage on macro investments unfortunately. For daytrading, slippage of a few pips is common. In large market moves, such as interest rate changes, you don't want to be in 'em when they happen.
Personally? I'm weighting more dividend stocks, I would buy more in a market downturn, not set any stops, and review positions monthly.
Re: Stop order slippage risk
S&P500 prices are back to where we were in January 2018 when my stops kicked in about 5% from the peak and I greatly reduced equity exposure. The S&P500 made only about 4 or 5% total return since then, as did my very conservative portfolio. However what I stopped out of was mostly international/emerging markets which are now more like -20% total return since January 2018 so I'm much better off than I would have been if I held all this time.