When to sell

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11. Limitations of stoplosses

If you do elect to use stoplosses, you need to be aware of their limitations:

1. Stoplosses do not guarantee that you will lose only the percentage that you have decided on. Prices sometimes fall by more than your limit before you have time to sell. This does not mean, as is sometimes suggested, that stoplosses "do not work". It just means you have all the more reason to sell immediately in order to cap your loss.
2. It makes sense to relate each stoploss to the volatility of the share in question, rather than always apply a fixed percentage. For stable stocks, a 10-20% fall may well be an unusual event, and a meaningful sell indicator. But for volatile technology stocks, such moves are a daily occurrence. You need to allow them greater leeway, such as a 30-40% stoploss, or you will be constantly trading in and out of them.
3. Remember that you only get paid the offer price when you sell, not the mid-price. Your stoplosses will not be accurate unless they take this into account.
4. Stoplosses do not work well with illiquid stocks such as "penny shares". If your stoploss is 15%, but the spread on your shares is 10%, the price only needs to fall 5% to nudge you into selling.
5. Discount brokers will not accept sale orders that are conditional on a stoploss being breached. Instead, you have to watch for when that happens, then call your broker to make the sale.
6. If you are an investor rather than a trader, you should probably suspend your stoplosses if the market is hit by an event that drives down prices in general, not just the prices of your holdings. This will prevent you suffering needless losses. In this type of situation, prices almost always come back surprisingly quickly. For example, after the crash of 1987, many shares still ended the year higher than they began it.

1. When should you sell? 2. What is your overall strategy? 3. Selling for passive investors 4. When to take profits as a value investor 5. When to take losses as a value investor 6. Selling for growth investors 7. Mechanical formulas for selling 8. Selling in order to reinvest 9. Stoplosses 10. The argument over stoplosses 11. Limitations of stoplosses 12. Profit warnings 13. Selling for traders 14. William O'Neil's trading system 15. The most important rule of all 16. Emotional problems 17. Conclusion

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