Ask Colin

A book suggests stop-losses be set 5% below support for US stocks with a beta of 1 and 10% below support for US stocks with a beta of 2. Does this apply in Australia?

Beta simply measures how volatile the stock is relative to the market. So he is saying that for a stock that generally moves in line with the market, use a stop 5% below the lows. However, if a stock is twice as volatile as the market use 10%. This sounds rather generous. In my experience, once a stock goes a couple of percent below the lows, it has usually failed to find support. However, it is also true that low priced stocks might need to be given a bit more room.

Personally, I would not tolerate more than 2% and if a stock did hold at a lower point and start rising again, I would consider buying it back. You could look at CRU as recent example.

The principle is to cut losses quickly. Sometimes this means you will cut a loss too soon and it recovers. But it will save you from the ones that really hurt your account.

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