Stop Loss Positioning Guide
#1
This thread will cover where to place your initial stop loss and how to trail it as the price of the stock moves higher in Stage 2. For the initial examples I've used a Global Trend Alert Newsletter that I received from Stan Weinstein as a free sample last March. So the examples are the actual positioning as suggested by Stan himself in the March 2012 GTA, and hence we can study these old recommendations to learn the correct positioning for ourselves. So remember these are over a year old and were made when Weinstein viewed the longer and intermediate term outlooks as still bullish at the time, but the short term as only moderately positive, but "beyond extended" with more near term warnings than they could keep track of and with signs of “churning” on the tape, as stocks had broken out and gone nowhere in a hurry. So he was emphasising the "Forest to the Trees" approach - which can be found on page 75 of the book and suggests stock picking the best few chart patterns from the strongest sectors only when the overall trend is positive as it was back then. So hopefully that gives you some context to these charts as the majority likely failed to get very far in the short term, as it was around five weeks before the intermediate term top in the S&P 500 and hence there was likely a lot of failed breakouts in these, at least in the short term. Which I think highlights the importance of the overall trend and the type of buying you do at particular points in it. But that is a subject to discuss in another thread as this thread is to learn correct stop loss positioning and so doesn't matter whether these were successful or not, just that the stop loss would have protected the position from further downside if it failed in it's breakout.

I plan to mark all of the charts up on the daily and weekly charts that I use from stockcharts.com that show the key moving averages, relative performance versus the S&P 500 and the volume. But to begin with below are the Investor and Trader ideal charts recreated and updated from the charts in the book on pages 185 and 195 which around where you will find the stop loss section in the book.

Trailing Stop Loss Guide for Investors (Average 12 months)

I will write out the full description for these diagrams when I have more time. Refer to the Chapter 6 in the book for a full description of how to trail your stop loss. Below is the recreated diagrams...

[Image: attachment.php?aid=520]

Trailing Stop Loss Guide for Traders (Average 2 to 4 months)

[Image: attachment.php?aid=521]


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isatrader

Fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill – Reminiscences of a Stock Operator.
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#2
Here's the first example charts of where to put to put the stop loss. In March 2012 Abbott Laboratories (ABT) was recommended as a continuation buy on a pullback towards the 56-57 zone. The Trader Stop Loss was given as 54.49 and the Investor Stop Loss was given as 52.99.

Trader stop - looking at the daily chart the pivot low was 54.74 and so the 54.49 gives a little bit of room, plus it's below a half number as suggested in the book on page 183. The pivot low used is not visible on the weekly chart, which shows that it probably doesn't have to be the last major pivot, just the last notable pivot low, but this will become clearer as I go through these examples.

Investor stop - 52.99 was the recommended level, which is below the 30 week MA and also just under a round number. On the daily chart it is just under the 200 day MA also, but again it is not clear if this has any relevance yet until I go through more examples.

ATR distance to stops - On each chart I'm looking at the ATR(200) percentage distance from the recommended entry points to see what the average is for trader and investor positions as this could further help when choosing potential stocks with the risk reward calculations. For ABT the ATR(200) was 0.809 at the time of the recommendation and so:
  • 1.87% to 3.10% ATR - Trader stop range
  • 3.72% to 4.96% ATR - Investor stop range

Other observations - Price dips below the 50 day MA on a number of occasions; volume only average; relative performance fairly flat; moving averages all rising.


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isatrader

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#3
Archer-Daniels-Midland (ADM) was said to be in a strong Stage 2 uptrend, and additional buying was recommended on pullbacks towards support around the 30-31 zone. The Trader Stop Loss was given as 28.99 and the Investor Stop Loss was given as 27.99

Trader stop - on the daily chart the last pivot low was 28.11 and so the 28.99 suggested stop loss position was decided by other means. The 6% rule is a potential reason, as from the max entry of 31 that would give 29.14, and so as it's close to a round number and so it would be put just below following the rules. The other possible reason could have been the 200 day MA which was at 29.11 at the time.

Investor stop - 27.99 was the recommended level, which is below the swing low of 28.11 and the 30 week MA, and also just under a round number again. On the daily chart it's under all the MAs, but the reason looks to be solely based on the pivot low for this one imo.

ATR distance to stops - For ADM the ATR(200) was 0.731 at the time of the recommendation and so:
  • 1.38% to 2.75% ATR - Trader stop range
  • 2.75% to 4.12% ATR - Investor stop range
Other observations - no notable volume increase on or following the breakout; relative performance versus the S&P 500 was below it's zero line still and divergent from the price action; 30 week MA was flat on the breakout; finally there was near term resistance to around the 32 level. So would only have been considered an average pick per the methods entry requirements, and not the A+ type of stock that the forest to the trees approach was looking for at the time, so am not sure why it was included other than it was in early Stage 2.


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isatrader

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#4
AES Corp (AES) was said to have a favorable technical pattern and buying was recommended on a pullback towards the 13 level. The Trader Stop Loss was given as 12.49 and the Investor Stop Loss was given as 11.39

Trader stop - on the daily chart the last pivot low was 12.56 and so the 12.49 suggested stop loss position was directly under the pivot low and the under the half point.

Investor stop - 11.39 was the recommended level, which is below the swing low of 11.43 that was near the 30 week MA. The stop was also placed below the 30 week MA.

ATR distance to stops - For AES the ATR(200) was 0.342 at the time of the recommendation and so:
  • 1.49% ATR - Trader stop distance
  • 4.71% ATR - Investor stop distance
Other observations - AES had closed above the 2011 range/resistance and was pulling back to test it; below average volume following the breakout; relative performance versus the S&P 500 is above the zero line; 30 week MA had recently turned up; it had been rising for 6 months making higher lows. So this was stronger pick than the previous stock, but still only a reasonable B grade type pick per the methods entry requirements due to the lack of any volume increase imo.


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isatrader

Fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill – Reminiscences of a Stock Operator.
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#5
Aetna (AET) was said to be a bullish stock with good support in the 45-45.50 zone, and it was recommended as a pullback buy towards that area. The Trader Stop Loss was given as 42.99 and the Investor Stop Loss was given as 40.49

Trader stop - on the daily chart the last pivot low was 43.28 and so the 42.99 suggested stop loss position was directly under the pivot low and also under the full point.

Investor stop - 40.49 was the recommended level, which was below the swing low of 41.05. The 30 week MA was at 40.94, so we can see that the stop was placed below both and the half point.

ATR distance to stops - For AET the ATR(200) was 1.06 at the time of the recommendation and so:
  • 1.90% to 2.37% ATR - Trader stop range
  • 4.25% to 4.73% ATR - Investor stop range
Other observations - AET only had average volume on and following the Stage 2 breakout; relative performance versus the S&P 500 was positive; the 30 week MA had just turned up.


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isatrader

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#6
Allergan (AGN) was said to be consolidating beneath final resistance at 90, and it was recommended as a breakout buy (on a closing basis) above 90. The Trader Stop Loss was given as 85.99 and the Investor Stop Loss was given as 82.99

Trader stop - on the daily chart the last pivot low was 86.45, which had been tested twice in a four day period the previous week, and then had rallied off from it, and was testing the top of the range just below 90. So the suggested stop loss was below the pivot lows, and had been placed below the whole number also.

Investor stop - 82.99 was the recommended level, which below the last notable swing low on the weekly chart of 84.30. The 30 week MA was at 83.86 and so I would have expected it to go below the half point at 83.49, but the 200 day MA may have been considered also which was at 83.20, but I'm still not clear if the 200 day MA is used or not when considering the stop position. But I can't see any other reason for going that far below the 30 week MA on the chart.

ATR distance to stops - For AGN the ATR(200) was 1.564 at the time of the recommendation and so:
  • 2.56% ATR - Trader stop distance
  • 4.48% ATR - Investor stop distance
Other observations - AGN also had below average volume for the most part; relative performance versus the S&P 500 was just positive on the weekly, but had been weakening for around six months; and the 30 week MA had just turned up. It had been in a fairly tight range for around four months, but was still moving gradually higher.


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isatrader

Fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill – Reminiscences of a Stock Operator.
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#7
Nice work Isa- Being able to see some of his actual picks on a chart that is a lot more visible than in the book is really going to help me in a number of ways.

"The pivot low used is not visible on the weekly chart, which shows that it probably doesn't have to be the last major pivot, just the last notable pivot low, but this will become clearer as I go through these examples."

Your quote here is something I have been thinking the whole time as sometimes you see a great looking breakout but the stop loss is way too low going by the weekly chart's major pivot. Great to know this little tidbit.

Again, thanks-

Also really nice to know the average ATR where the stops are at. Looks about 2-3 for the trader and 4-5 for the investor. I wonder what kind of importance he puts on keeping it in such a range. I remember him saying in the book that if you see 3 A+ stocks that you should pick the one isn't too far (% wise from the current price). ie- you wouldn't want to risk 15% when one is there that you could be risking 5%. I wonder if he had to pass on some better picks to meet this standard as these picks, like you say, are not A+ picks.

Another thing that I see, and you also mention, is the serious lack of volume. I remember you saying back on the t2w forum about my Yahoo pick that you weren't sure if mattered as much these days because of the big institutional buying but it seems like he just abandoned that rule completely. Not sure what exactly that means.

Not sure if you did this at some point in the past but if I might ask...Do you think you could send a list of the picks as I would like to see how many different sectors and how many from each sector that he chose.

Thx
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#8
As the ATR risk is my customisation I doubt it's considered at all. But instead the risk is just gauged from his experience. The point of me putting the ATR ranges on these is to see what kind of risk "his experience" tends to suggest. From the 37 examples from the S&P 500 the average for a trader position is between 2.28% to 2.62% ATR, and for an investor position between 5.08% to 5.41% ATR. However, this is a combination of the two types of picks i.e. a pullback entry and breakout entry and so broken down further you get a 1.72% to 2.62% ATR range for the trader pullback entries, and a 3.23% ATR average for the trader breakout entries. So as you can see, these are quite different and the pullback entries have a much lower risk than the breakout entries. For the investor positions the averages are 4.51% to 5.40% ATR for a pullback entry and a 5.75% ATR average for breakout picks. Remember though that the sample size is quite small, but it gives a rough idea at least I think of the levels of risk that are normal for the method, and we'll learn more as we study more real examples.

The first thing that struck me when going though all the examples was the amount of pullback entries, as it's not an area I had focused much on, as they weren't talked about much in book. There's a lot of picks from this GTA report that say something like "additional buying should be done on a pullback to..." which is probably due to the Stage the market was in i.e. late in Stage 2 in this case. But it is interesting as I'd been solely focused on breakouts and had not been considering pullbacks, except to the B entry point following the initial Stage 2A breakout. So buying pullbacks to support in strong Stage 2 uptrend is something I'll need to explore further on the site as it looks to be more prevalent when the market has been in Stage 2 for a while.

Cheers
isatrader

Fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill – Reminiscences of a Stock Operator.
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