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Stop-Loss (Limit) Orders  
Suggested guidelines for use of Stop-Loss limit orders with the Investment Tables.

The information provided here represents the view of Vector2000 on the use of Stop-Loss limit orders, and is not intended to sway Investors from using their own methods and formulas for loss prevention and control. Investors are advised to apply their own mechanisms and level of prudence based on personal trading experience.
 
The proper prescription for using Stop-Loss orders, whether trailing or limit, and establishing a best scenario implementation and the optimum trigger limits can be a daunting task. We have in the past tried to suggest times and percentages for setting such orders, but could not come up with a satisfactory formula that can balance both safety and function. It has been our experience that, more often than not, a Stop-Loss order entered with the intent to protect the Investor from a possible steep loss, in reality can turn out to be more of a Loss Order. We would therefore suggest that one consider, as we do, being somewhat liberal with the stop loss activation point or trailing point. We are not saying that Stop-Loss orders do not have their place and function, however, great care should be exercised when used as sometimes they can work against the Investor.

The following graphs may help better explain our reasoning.
 

The 2 graphs below demonstrate the possible pitfalls of Stop-Loss orders. On the first graph (day trade), the stock shown was recommended as a LONG, with a buy-in time of 10:00 AM. A Day Trader would have entered a position at about $3.38, and exited towards the end of the day at about $3.44 - providing for a modest gain. However, with a 'reasonable' stop-loss order in place (even as distant as 10%), at around 1:10 PM a trader would have had his position liquidated for about $3.15 (maybe lower), resulting in an early exit and consequential loss.


On the Short Term graph below the same scenario is evident, a sudden drop in price (Wednesday morning) would trigger a Stop-Loss order in place from the prior day. An investor is again forced to exit prematurely and is left with a loss.

On both of the above graphs (more evident on the Intra-Day) you will notice a spike in volume coinciding with the price drop - possibly indicating stop-loss orders being activated and those shares in turn being 'scooped-up'.
 

There is a golden combination that all Investors are searching for - the excitement of trading in the markets with the ability to 'sleep well at night'. Many feel that Stop-Loss orders help provide this (to an extent) by offering protection should their investments suddenly go sour. Investors are a little more confident knowing they have mechanisms in place to limit any serious damage. A sort of loss insurance. The problem is that although this may limit the loss, it does not protect from a loss, and in some cases can result in a loss.

If an Investor is trading a stock based on a 'hunch', or the latest media article, Analyst recommendation, etc. then a stop-loss order may be beneficial as there is no track record that can be referenced under identical or even similar circumstances, and although a gain is anticipated, one must also assume and prepare for the worst. However, if an Investor is trading stocks based on a System, then the insurance stop-loss orders may provide might be substituted with the Systems track record and the Investors confidence in it. Any good system will not focus just on 'high returns' here and there, but will rather provide good returns, consistently over a period of time, and this in turn will help reduce or eliminate any draw down that may be incurred with the indiscriminate use of stop-loss orders.

One other important aspect of trading insurance is Money Management. While this can be made into a complex subject the underlying idea is simple - don't put all your eggs in one basket. In other words, always try to invest evenly across a few Securities, diversifying your portfolio across more than one sector, effectively minimizing risk.

 

While creating Vector2000, the Investment Tables and related trend and timing indicators, we recognized that an Investment System is only as good as the Users' confidence in it. This is why we publish our results regularly and completely. And this is why we suggest that rather than using stop-loss orders indiscriminately with sporadic trading here and there, follow the system for a while, gain confidence in it and then use it as it was designed to be used - a system that will return good and consistent results over a period of time, despite inevitable bumps along the way (providing it is used as a system - with regularity and consistency).

We recommend a consistent amount be invested evenly into a minimum of 3 recommendations from any one desired table. This should provide for a very simple yet effective money management strategy, and also insurance should any one stock in the group turn ugly. An Investor does not need to be limited to using just one table at any one time. What is important is that at least 3 recommendations be used from each desired table.

As for Stop-Loss orders, we would recommend they also be used in the capacity of a Protect-Gain order, or better known as a Trailing Stop-Loss. That is, once a comfortable gain has been achieved a Stop-Loss order 2-3% away from current trade may be entered. This way if the stock should reverse, you're profits are locked in (relatively), if it should keep gaining, follow it through to the end of the cycle, always adjusting the Stop-Loss to track the stock as it gains, or allowing a trailing Stop-Loss to do that for you. This can successfully be applied to day trading where towards the end of the day stop-loss orders may be used to follow up any gain (or down for Shorts). For Short Term investing stop-loss orders can be used in the same fashion, but Investors might consider setting them to expire at the end of each day. A stop-loss left overnight may produce unpleasant results at the very onset of trade the next morning - as demonstrated in the graph above. Once normal trade commences, the stop-loss order may be installed again and carried through the duration of the day.

One should still use Stop-Loss orders as a traditional means of protecting investment capital, but as mentioned before, we would suggest a liberal activation point (about 6-8% from the entry price). For our Performance Tables only we use a recorded Stop-Loss of 4% for Day Trade and 8% for Short Term investing, based on a security's OPENING trade at the start of the cycle. The Stop-Loss is activated only when a security deviates the predetermined amount from its initial regular hours trade.