"So true but I have seen too many times a stock get hit just to trigger stop losses or margins and bounce right back up. Osisko (OSK at TMX) comes to my mind from 2009 to 2010."
That's likely because you placed your stop too close to the noise. It certainly is possible that you can get stopped out and have the stock run up on you again but that is part of the market. Now look at how many times you've been trounced by a bad market. It's those that can really hurt you. With a stop you know what your risk is. What you lose on getting stopped out is dwarfed by what you lose on one of those huge down drafts. Ask how many wish they'd had a stop set up from 08 on. I've watched stocks go up and down along with my principle when a stop would have taken me out for me to re-enter at a better price....like it did for me today. I wonder how many who held CMM wish they'd had a stop in yesterday.....and today as it continued to plummet. Most haven't got a clue how to set a stop as it also involves position sizing which most have never heard of.
A rough formula is to find out what the average true range of a stock is and you'll be amazed to find out how often a stock nails this number most days until an event takes place. You can find out the ATR of any stock on Stock Charts. In a volatile market a 20 day ATR for a .75 stock might be 5 cents so you might try setting a stop for .15 (3X the ATR) below your entry price to stay out of the daily noise. On a .75 cent stock this would be a 20% loss if you were stopped out with the trade going against you. Here is the kicker though, it should still have only cost you 1% of your account (if that's the risk you want to take) because you made sure that you only bought enough of that stock to risk a total of 1%. So if you only wanted to risk 1% of a 20K account for example you would lose $200. So how many shares should you have bought to attain that $200 risk?
With X = amount going to be invested..... and .2 being the 20% risk
X * .20 = $200
X = 200/.2
X = 1000
You find that you are able to invest $1000 on this stock or to buy 1333 shares at .75. So you say that you want to buy more share though because you feel this stock is going to the moon. Well, therein lies the discipline. If you don't want to lose more than the $200 then you simply don't go there. Sure you could risk more than you set out to but then you've left your plan and you no longer maintain consistency....you pander to whimsy instead. If you decide you can handle the higher risk then the world is your oyster and the variables change.
Needless to say there are many formulas and variations on a theme. The above is just one and they need to be fine tuned for market volatility. You could well have a very narrow ATR and therefore move your stops closer with less risk and of course as Crazy T commented you trail them after a rising sp to the point where you'll likely always gain as your stop passes your entry sp and chases your gains. In a market where you can place your stops more closely you'll be able to buy more shares as the risk level will be less. There is certainly a lot of perspective and tolerance levels involved with how high or low you want to set numbers. The stats are that most people in the market never really make money and a high percentage lose it all and never return. There are reasons for the latter. It's not a game...unless you use it for gambling and you accept the risk....but even gamblers use a system of some kind. By the way, what are the odds for the house vs. the gambler?
