Intermediate4 min readRisk and Portfolio Management · 4/11
Common Stop-Loss Mistakes
You can have a stop loss written down and calculated and still end up with a much bigger loss than planned. The cause can be a trade-management mistake like the ones below, or market conditions such as gaps can make the fill worse than planned.
What you will learn
Know common mistakes that empty a stop loss of its meaning.
See in numbers how moving the stop down makes the loss bigger.
The lesson as a short video · 20 seconds · Watch on YouTubeIn this lesson
The price gets close to your stop, so you tell yourself "let me give it one more chance" and move the stop a little lower. The reason you set the stop there has not changed; what changed is that you do not want to admit the loss.
A worked exampleYou bought 1,000 shares of an invented company, Upper Egypt Sugar, at EGP 10, with a stop at 9.50: a planned loss of EGP 500. The price reached 9.55, so you moved the stop to 9, then to 8.50. Exiting at 8.50 costs EGP 1,500: 3 times what you planned, in the same trade and the same stock.
Raising a stop to protect part of a gain is one thing; lowering it to dodge a loss is something else entirely. The second is what turns a small loss into a large one.
Other common mistakes
MythThe stop must be very close so the loss stays small.
RealityA stop inside the stock's normal range can take you out on an ordinary move. A small loss comes from buying fewer shares, not from a tighter stop.
MythI will put my stop at a round number like 10.
RealityA round number is not a reason by itself. The stop comes from the level that cancels your reason for entering.
MythThe stop will get me out at exactly my price.
RealityIf the stock opens below it or falls fast, the fill can be worse. With a limit price, it may not fill at all.
MythI have a stop, so I am safe whatever the amount.
RealityA stop without a calculated position size can still produce a large loss. The two have to be worked out together.
After the stop is hit
Sometimes the stock turns back up right after you exit. That happens. It does not prove the stop was wrong; its job is to limit your loss in the cases where the price keeps falling, and nobody knows in advance which case it will be.
Watch outJumping straight back into the same stock to "win it back" is a common mistake. If you decide to return, it is clearer to treat it as a completely new trade: a new reason, a new stop and a freshly calculated size.
Keep the stop in sight
Set a price alert at the stop you chose, and decide now what you will do when it gets there.