I finally made it over the big water hazard and arrived safely in Germany. As usual, jet lag will be my companion for a few days, and the 9-hour time difference is challenging at times when trying to get things done. So bear with me, if my email responses are a day late.
Reader Leon had a follow up comment on the sell stop discussions of the past few weeks. Here’s what he said:
Thanks very much for your timely and insightful comments and services. I enjoy reading your comments. We are in agreement on many things.
I’m on the Institutional side of Schwab as you are. In your comments, you have addressed trailing stops many times and I agree with their use–however, Schwab Institutional doesn’t offer trailing stops. In lieu of not having trailing stops, I have to key them in and then adjust frequently or use mental stops. How do you deal with this situation?
As I have commented before, whether a custodian offers pre-set sell stops or not makes no difference to me. I track them separately on a spreadsheet and, only once they are triggered, will I place the order the next morning. There are 2 reasons for this:
1. Since I only work with day-ending prices for sell stops, there is no need to enter them prematurely.
2. You are not subjected to intra-day market noise that may not have any bearing on long-term market direction.
In other words, whether I buy mutual funds or ETFs, only the closing prices will be considered when making sell stop decisions.
Comments 1
Ulli's right. Although I'm an options and futures trader, I believe the same principles of sell stops, using closing prices, which Ulli writes about for mutual funds, ETFs, stocks, and futures also apply. I have found, for me, that if I use intra-day sell stops, I can get knocked out of a position, prematurely, because of all of the intra-day fluctuations, in price.
It's nice and easy to program your online brokerage firm's computer or tell your broker to have a trailing sell stop or some other type of sell stop, which will take you out of a position automatically — just sit back and let their computers do the work.
Sometimes, though, I watch one minute, five minute, etc. of real-time changes, on my programs, in stocks, ETFs, and options prices, and they can very quickly go way up and then go way down, even in one minute's time. It's bad news, for you, to get kicked out of a position, that changes one minute, then later in the day comes back and closes at a much better position. I've found, for me, that rarely does an option, a stock, or an ETF, which underlies my option change drastically in one day so much so it knocks me out of my position (Although sometimes, I make intra-day changes, with options to repair damages, when trades are going against me; but that probably isn't relevant to most of you).
Of course, you can have an equity or a future position go against you enough to trigger a stop sell, intra-day. When it does happen, and I don't get out, generally, I chalk it up to bad luck. I've found for me, I'm much less likely to get knocked out of a position prematurely, by using closing prices than I am by using intra-day prices.
So, I stick with closing prices as the best way, for me, to determine when my sell stops has been hit, even though I don't know of any computer program or brokerage firm+ that will calculate closing prices as daily sell stops. And I believe your financial advisor or you, if you don't have a financial advisor, have to look at your sell stops EVERY day. I believe if you, or if you don't have a financial advisor like Ulli look at your sell stops every day, or if you do your own trading and don't have enough time to evaluate your sell stops EVERY DAY and make changes in your sell stops, EVERY DAY, then you don't have enough time to be managing your portfolio, because you aren't giving the proper amount of time to properly manage the very basic aspects of it; I believe that poor choices in stocks, ETFs, mutual funds, futures, and options are more forgiving than ignoring stop sells.