Stop Loss 조정

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Stop Loss: Explained & The Best Strategy

A stop-loss order protects profit or limits risk on an investor’s open position by exiting at a predetermined price. Placing an order to sell a long stock position if the price drops 5% below the purchase price is an example of a stop-loss order.

In this post, we will dig into what a stop loss is, the different types of stop-losses, understand what a trailing stop-loss is, and analyze the best stop-loss strategy for the S&P 500, ETFs, and equities. I’ll also provide code using Backtrader with data supplied by Intrinio for those interested in trying it out themselves.

You can follow along with Stop Loss 조정 the code at the Analyzing Alpha Github.

How Does A Stop-Loss Order Work?

After a trader opens a long or short position by placing an order with their broker, they will often add a follow-up stop-loss order to limit the amount of money they can lose if the investment moves against them. This order stays open until it reaches the stop price, and at that point, the order becomes a market order and executes.

Because it’s a market order, there is no guarantee that the order will execute at the stop price due to slippage. Unexpected news or market conditions can result in a stop-loss order completing at a dramatically different price than the stop price.

A stop-limit order, which executes as a limit instead of a market order, can help alleviate this problem with one significant risk — the order may never execute if the limit price is not hit, causing substantial losses.

Stop-Loss Benefits & Drawbacks

Stop-losses provide many benefits and one big drawback: Automatic execution ensures a trader is limiting their losses to a predefined level, preventing loss aversion. Placing the stop-loss orders in advance with the broker enables a trader to step away from monitoring the markets.

A stop-loss has one primary risk — volatility causing you to hit your stop price too frequently, eroding your capital due to fees and slippage. We’ll look at the optimal stop-loss placement below.

How do Traders use Stop-Losses?

  • The exit method for every trade
  • The worst-case scenario

While stop-loss orders help to minimize losses, they can also protect gains. Trailing stop-loss orders can help provide profit Stop Loss 조정 protection.

What Is A Trailing Stop-Loss Order?

Trailing Stop Orders follow the price and can help protect profits while providing downside protection. With a Trailing Stop Order, you do not have to adjust for price changes regularly.

Trailing Stop Example

Stock A is trading at $100. We place a 5% trailing stop order with our broker. The stop price would be 95% of our high price, or $95. The next day the stock trades to $120. Our stop would automatically adjust to $114. The following day, the stock drops to $114, hitting our stop, and our broker places a market order where our fill price due to slippage is 113. We made $13 on this trade as we purchased the stock at $100 and sold it automatically through a trailing stop order at $113.

The Best Stop-Loss Strategy

Now that we’ve covered the basics let’s dig into the best stop-loss strategy for the S&P 500 index, ETFs, and the S&P 500 constituents. The backtests will use the ten years starting in 2010 and ending in 2019. Unless stated otherwise, all charts will use the 5% stop loss.

S&P 500 Stop-Loss

The verdict? It appears that the trailing stop-loss performs worse than the stop-loss. Being in the market seems to be the most critical factor for performance in this backtest. The results make sense as economic growth and prosperity are on an upward trend most of the time. Also, the risk of SPY going to zero is much less than with instruments that aren’t as broad. In other words, if SPY goes to zero, it’s unlikely your primary concern at that point would be if a stop-loss or trailing stop-loss performs better!

Sector Stop-Loss

Equities Stop-Loss

Next up, we’ll try something a little different. We’ll momentum rank the top 20 S&P 500 companies. This strategy will use the same approach as in the sector momentum backtest.

The Bottom Line

This analysis shows how important it is to be in the market. Setting your stop loss too narrowly can lead to significant underperformance. An excellent next step would be to test stop-loss strategies for individual market anomalies.

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Stop-loss strategies: Where to put a stop loss

Stop-loss strategies: Where to put a stop loss finger stops coins falling

Stop-loss strategies: Where to put a stop loss Photo: conzorb / Shutterstock.com

Cutting losses short and letting winners ride is one of the oldest tenets of trading and investing. The question that follows is: what is a stop loss strategy and how could it help determine where to set stop losses?

In this guide we attempt to answer these questions by explaining some of the most widely used stop loss techniques.

What is a stop loss?

A stop-loss order is a market order placed with a broker to buy or sell a security when it reaches a certain price. This is done to limit losses in the event that the price of the security moves against the position taken by the trader.

A stop loss on a long position would be an order to sell at a lower price than the entry price. A stop-loss order on a short position would be set above the entry price.

Risk-per-trade approach

This method revolves around protecting your own capital. As far as stop loss strategy options Stop Loss 조정 go, the risk-per-trade approach to reduce increasing losses is simple and is regarded as an effective way to manage risk when trading.

By determining the maximum amount of risk you are willing to take on each trade, you can set a stop loss that will limit your losses if the trade goes against you.

The maximum risk you are willing to accept on a trade should be a dollar amount, or whatever currency your trading account is based in. The dollar amount is determined as a percentage of the total value of the trading capital in your account.

There are a few different ways to calculate your risk-per-trade, but one of the most popular is the 2% rule. This principle says that you should never risk more than 2% of your account on any single trade. So, if you have a $10,000 account, you should never risk more than $200 on a trade.

Risk-reward strategy

The risk-reward stop-loss order strategy compares the size of your stop loss with the size of your intended take-profit order.

There are certain risk-reward ratios that can be used as guidelines. For example, a 1:3 risk-reward ratio means that for every 1 point of risk, the potential reward is 3 points. This ratio can be used when the market is trending strongly in one direction.

Another example is a 1:2 risk-reward ratio, which can be used when the market is range-bound or choppy. In this case, the trader is looking for a small movement in price in order to make a profit. Note, however, that all trading contains risk, and some losses are unavoidable.

Of course, these are examples and each trader will need to find the types of stop losses with risk-reward ratios that work best for them.

There is no right or wrong answer, but a risk-reward ratio may allow traders to minimise the downside without restricting the upside.

Note, however, that all trading involves risk. Always conduct your own due diligence before trading. And never invest money that you cannot afford to lose.

Volatility approach

The volatility stop loss is a strategy that uses the volatility of the market to determine where to place your stop loss.

Volatility varies – there can be more or less movement in the market over time. By using the volatility of the market, you can change the size of your stop to fit current market conditions, thus placing your stop loss in a more strategic location.

For example, if over the past 10 days the S&P 500 stock index has moved by an average of 20 points a day, it may make little sense to have a stop loss of over 20 points for an intraday trade.

Chart

The classic volatility approach to stop losses is the ‘average true range method’, using the Average True Range (ATR) indicator.

The ATR is a measure of the volatility of the market. By using the ATR, you can place your stop loss at a point that’s just beyond the furthest price likely to be reached under current volatility conditions.

While incorporating volatility into how you choose a stop loss can add value to your trading strategy, it is worth bearing in mind that the ATR is a lagging indicator, which means that it cannot predict future levels of volatility, only tell you what it was in the past.

Note that past performance is no guarantee of future returns. And never trade money you cannot afford to lose.

GME

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Support and resistance approach

Using areas of support and resistance (S/R) is a classic textbook way to place stop losses. This strategy may be the most clear-cut in terms of where to place stop losses.

The logic is that if the price moves past one of these price levels, then it invalidates the reason to be in the trade and is a cue to exit the trade. Support and resistance is the common way of putting a stop Stop Loss 조정 loss in swing trading.

The support and resistance approach to where to place a stop loss is a technical analysis strategy that is used to identify key price levels where the price may be likely to rebound or Stop Loss 조정 retrace.

A support level could stop the price from falling, and a resistance level could stop the price from rising. Therefore, placing a stop loss just beneath a support level or just above a resistance level could result in a better chance that a losing trade reverses in your favour before the stop loss is hit.

These S/R levels are typically identified using previous highs and lows, as well as using technical indicators such as moving averages (MA) or Fibonacci retracements.

Chart

The advantage of this method to stop losses is that it can help to identify key price levels where the price is likely to find support or resistance. This can help to place stop-loss orders that are more likely to be effective in limiting losses.

The disadvantage of this approach is that it’s based on technical analysis and is, therefore, subject to interpretation. Technical analysis is based on historical price action, which is no guarantee of future returns.

A trailing stop loss

A trailing stop loss strategy is the most applicable in trend following. Trend followers attempt to enter a price trend just after it has begun and exit just after it has finished.

Trend followers do not try to predict how long a trend will last. They do not set a ‘take profit’ level in advance. Instead, trend followers will normally use a stop-loss order to exit a trade, even if it’s still profitable.

A trailing stop loss will be set at a certain number of points or at a percentage behind the entry price. If the market begins to trend in your favour, the Stop Loss 조정 stop loss will trail the market price by those same number of points.

When the market reveses, the trailing stop remains in place. If the market falls, the full size of the stop-loss order gets triggered.

Chart

Some traders use a moving average such as the 50 DMA to stop loss entry so that as the moving average rises in an uptrend, the stop loss moves up accordingly.

Stop loss limitations

A stop loss is a tool for traders to reduce but not remove trading risk. Stop losses are not infallible and have some limitations. Even using the above techniques, it can be difficult to determine the correct level at which to set a stop loss.

If a tight stop loss strategy is used and the stop loss is set too close to the current price, then it may be triggered by a small fluctuation and result in a loss. On the other hand, if the stop loss is set too far away from the current price, then the potential loss may be too great.

Even if the stop loss is set at the correct level, there is no guarantee that it will be triggered – markets can be highly volatile and prices can move very quickly. Unless it is a guaranteed stop loss, which typically comes at an additional fee.

Market makers at large institutions like banks and hedge funds can see where stop losses are on their books. This gives them a huge advantage over retail traders and some will engage in a stop loss hunting strategy. That typically involves executing large sell orders to trigger stop losses, which cause an extra wave of sell-stop orders, creating a short-term profit.

Lastly, if a stop loss is triggered, it may be difficult to re-enter the market at a good price, as prices can continue to move in the same direction.

In conclusion, there is no best stop loss strategy, but there are a variety of techniques that are best used according to your trading strategy and risk management profile.

What are the strategies used to implement a stop loss?

There are a few different strategies that can be used to implement a stop-loss order such as risk-per-trade approach and risk-reward ratio approach to prioritise risk management. Other common strategies use support and resistance levels, a trailing stop or volatility range to decide the stop-loss placement. You should decide for yourself which stop-loss approach would suit your trading strategy, risk tolerance, portfolio size and goals. Note that all trading contains risk.

Where to place stop loss and take profit

The ideal stop-loss and take-profit levels will vary depending on the specific market conditions and your own risk tolerance. We encourage you to conduct your own due diligence and find a stop-loss and take-profit approach that would suit your trading plan.

How to set a stop-loss strategy

The most important thing to set a stop-loss strategy is to have a well-defined plan with clear entry and exit points before Stop Loss 조정 entering any trade. By doing so, you will increase your chances of success and avoid making emotionally-driven decisions that can lead to costly mistakes.

Stop Loss: entenda o conceito e aprenda a limitar suas perdas de forma eficiente

SÃO PAULO – Investir em ações é certamente mais arriscado do que aplicar em renda fixa. Sendo um investimento em renda variável, aplicar na Bolsa traz um risco maior de perda, já que ninguém garante se o preço da ação amanhã será maior ou menor do que hoje. Porém, existem formas de limitar potenciais perdas, com o uso da técnica de stop loss sendo uma delas.

Uma ordem stop loss nada mais é do que uma ordem para vender uma ação se ela atingir um determinado preço. Imaginando que você comprou uma ação a R$ 50, você pode colocar uma ordem stop loss a R$ 45, ou seja, se a cotação atingir este valor, a ordem pode ser efetuada, limitando sua perda a 10% do total investido.

Limitando perdas ou garantindo ganhos
Colocar uma ordem stop loss é simples: basta contatar sua corretora e determinar qual será o patamar de stop. Facilitando o processo, alguns home brokers já possuem esta funcionalidade, dando ao investidor uma garantia extra na hora de negociar ações.

Recomendado para você

Além da stop loss tradicional, você também pode colocar uma ordem visando garantir um nível específico de ganho: são as ordens conhecidas como stop gain. A dinâmica é similar, mas a diferença é que você determina um preço acima do atual. Por exemplo, se você comprou a ação a R$ 50 e tem como objetivo um ganho de 10%,você pode colocar uma ordem de venda a R$ 55, garantindo o ganho.

Qual patamar?
Existe muita discussão de qual seria o percentual adequado para uma ordem stop loss. Existe consenso, porém, no sentido em que investidores que negociam constantemente devem usar stops mais curtos, como por exemplo 3% ou 5%. Já para investidores que negociam menos, patamares em torno de 10% a 15% são utilizados.

No entanto, não existe um patamar fixo. O investidor deve acompanhar o desempenho do mercado e de cada ação e analisar qual sua estratégia. Momentos incertos ou papéis mais voláteis podem requerer um nível de stop mais elevado do que períodos mais calmos ou ações que flutuam menos. Estratégias de curto prazo requerem stops mais curtos, com investidores com perspectivas de prazo mais longo usando stops maiores.

Falando em investidores de longo prazo, para muitos não somente o nível do stop é polêmico, mas também sua própria utilização. Considerando um horizonte de investimento de longo prazo, alguns analistas acreditam que o stop loss não deva ser utilizado, já que flutuações fazem parte da dinâmica de mercado. Escolher a ação correta, desta forma, tornaria o stop loss obsoleto.

Vantagens
Apesar da polêmica, o stop loss pode trazer vantagens ao investidor. Uma situação típica é quando o investidor está ausente, em férias por exemplo. O stop loss pode ser fundamental para evitar que o aplicador corra riscos desnecessários neste período.

Outra vantagem clara é para investidores que acabam se envolvendo emocionalmente com as ações. Para muitos, vender uma posição em prejuízo é quase uma afronta pessoal, o que pode acabar ampliando as perdas caso as ações sigam em queda. Neste caso, a disciplina que o uso de ordens stop loss traz pode fazer a diferença na hora de contabilizar as perdas.

Uso de forma racional
Por fim, é sempre importante lembrar que adotar estratégias eficientes que utilizam ordens de stop podem não trazer custos adicionais ao investidor, funcionando como uma espécie de seguro gratuito. A utilização inadequada, por outro lado, com stops curtos demais, pode acabar saindo caro, já que mais transações são realizadas.

Determinar o intervalo ou mesmo a utilização de uma estratégia com stop loss depende de você. Analise seu estilo e seus objetivos e utilize esta ferramenta de forma correta, aprendendo a limitar suas perdas, que, mais cedo ou mais tarde, podem vir a acontecer.

What is a stop loss reinsurance?

A stop loss is a type of non-proportional reinsurance, just like the excess of loss. The stop loss reinsurance is designed to protect the primary insurer, the Ceding party, from bad results.

A stop loss reinsurance provides reinsurance coverage when the total amount of claims incurred during a specific period (usually one year), exceeds either a loss ratio, either in excess which is a specified amount up to a limit.

Most of the time, the deductible is determined by a loss ratio. The loss ratio is expressed as a percentage resulting in dividing total (incurred or paid) losses by total (written or earned) premiums. That is the reason why, the stop loss reinsurance is also known as Aggregate Excess of Loss Reinsurance.

For example, a 100% stop loss means that the reinsurer covers as soon as the total claims amount are at the same level or above the premiums amount. The higher the loss ratio, the worse the results. A high loss ratio might result from 3 different reasons:First, a high frequency of small claims which are aggregated;
Second, an increase of the large claims;
And third, too low premiums due to the inaccurate quotation of the insurer.

Consequently, the Ceding party will write stop loss Stop Loss 조정 reinsurance mostly for catastrophic claims, such as a tempest, a typhoon, hail or crop. Stop loss reinsurance is not accurate for long tail businesses such as casualty.

With a 100% excess of 50%, stop loss reinsurance written in 2019 for its catastrophic claims incurred in 2020:

  • The premium is estimated at 10,000,000 €, the Reinsurer will cover as soon as the total amount of claims incurred in 2020 exceeds the attachment point of 5,000,000 €; up to 15,000 000 €.
  • If the Ceding party registered several claims incurred in 2020, amounting to 6,000,000 €, the Reinsurer will pay 1,000,000 €.

Sometimes, the stop loss is specified, with both a ratio and an amount.

To summarize: the stop loss is a non-proportional coverage protecting the insurer against bad results. The Reinsurer pays whenever the aggregate losses of the year exceed the deductible of the treaty, mostly specified as a loss ratio, up to a coverage limit.

Stop Loss Industry Jargon: Lasering

Insurance encompasses a vast range of practices and phrases that may be unknown to someone who does not work within Stop Loss 조정 the industry. When researching stop loss insurance and its benefits, this terminology can become confusing and frustrating. In this post, the stop loss insurance term “laser” is dissected.

What does “laser” mean in stop loss insurance?

A laser is the practice of assigning a higher Specific deductible for an individual with a known condition that is likely to exceed the Specific deductible. It is essentially used when an individual on a plan possesses a higher pre-disposition for illness or higher health care costs than other employees.

What is the benefit of lasering?

Rather than raise everyone’s rate, the insurance carrier adjusts the coverage for that one claimant, raising the maximum out of pocket, to later be paid by the employer. This process allows other employees’ rates to stay low and unaffected.

Since rate increases are based upon the majority of rates within a plan, keeping the rates as low as possible will likely result in any increases the following year to start from a lower rate. Without lasering, all rates would raise to address the claim. A rate increase would inflate these costs.

When can lasers be used?

Typically, a Stop Loss 조정 laser is utilized when the stop loss market tightens up, therefore decreasing competition among insurance carriers. A self-insured plan can only absorb a couple of lasers. Lasers should not be employed to address all high health care costs a self-insured plan may have.

Though not necessarily mandated, lasering remains a common practice in the stop loss insurance industry. If you would like to discuss more about how your business can benefit from lasers, please contact us.


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