Tackle Today: When You Don’t Need a Stop Loss
May 14, 2021
≈ The Exceptions≈
Traders,
Our past few Tackle Today messages have emphasized the importance of using a stop loss. Now, allow me to mention the two exceptions.
You don’t need a stop loss on an investment. And I define investment as a stock you want to own forever. You believe in the fundamentals of the company. You’re confident it will recover from every downturn. You view each correction or bearish episode as temporary, and you have the patience to allow the occasional storm to blow itself out.
It’s also worth noting that position sizing properly really helps alleviate the need for a stop loss. If you have 5% or 10% of your portfolio in a single position, it’s much easier to let it ride than if the position represented 50% of your portfolio.
A second scenario where a stop loss is unnecessary is when you’re willing to risk the entire trade cost. Usually this is when you’re using options because they are far cheaper plays than stock. For example, suppose I have a $30k account and I buy a call spread for $300. Since the cost represented 1% of my total account size, I don’t have to use a stop loss. If the trade blows up, then I’m only out a small percentage of my account.
This is one of the perks of trading options. The low trade cost allows you to give the stock plenty of room to work itself out. No whipsaw, no premature exits.
#TeamTackle
Chart of the Day
SPY Long-Term Chart
If you really want to increase your confidence that your investment will recover over time, then use an ETF. The diversification decreases the risk of suffering a catastrophic loss. Consider the long-term chart of SPY above, for instance. There hasn’t been a bear in history strong enough to keep the S&P 500 down.
Video of the day
Buy One, Hold One Dump One
Coach Greg presents 3 stock ideas from Specialty Chemicals – $PPG $APD and $SHW – and Coaches Tyler, Tim and Matt have to decide to ‘Buy One, Hold One, and Dump One’ in this segment from Thursday’s Cash Flow Club
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