Ask Colin

Do you use a broker who takes stop loss orders?

My broker (CMC Markets Stockbroking)  takes stop-loss orders, but I have never had a need to use them.

My method is based on end-of day data. I generally do not watch the market during the day. The only exception is when I think a stock is very near a stop-loss level. Then I may check every hour or so.

When I download my end-of-day data I check if any of my stop-loss levels were violated by the low of the day. If they were, I enter sell orders (mostly "at market" unless the stock is very thinly traded) soon after the opening of trading the next day.

You have a day job where it may be difficult to check the market during the day. I was in that position for years. I traded a plan that was based on end-of-day data and entered orders before the market opened (the previous night or before going to work in the morning). When I am overseas, I often have to enter orders while the market is closed. That is why my plan calls for risking less than 1% of capital to my stop-loss level. It allows for some slippage, in the sense that I usually get out before hitting the more popular 2% risk level.

By the way, my broker (CMC Markets Stockbroking) and others have a SMS alert system if you stop is hit. That may be useful if you have a job where you can act on it.

If you decide to use a broker who takes stop-loss orders, be very sure that you completely understand how the broker's system works. There are some traps for the unwary who have not thought it through beforehand.

 

Keywords: