Ask Colin

Do you ever use a percentage stop-loss because your normal stop-loss is too far away from the current price?

I NEVER EVER use percentage stops. There is simply no logic to them and they will lead to consistent losses. There are two aspects to this:

1. The market does not care one jot what we paid for our shares. It is almost the ultimate in hubris to think that it would. However, the market does tend to respect certain levels repeatedly. This is strongly rooted in technical analysis. We can use these levels to decide where we would be wrong about a trade. That is where I have my stop-loss level - where I am technically wrong.

2. Using percentage stops actually INCREASES the risk of a losing trade. This is easily explained using support levels. If a support level is 12% below our entry point, but we use an 8% stop, a quite normal correction to support could take out our position at a loss and then the move continue into profit just as we had hoped. Having percentage stops above support levels therefore increases the risk your stop will be hit.

Of course I use rising stops. I call them protect-profit stops. I also have very clear exit rules. I explain all of this in my seminars.

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