A critically important the current stock price
component of the and you run the risk of
TurnerTrends investment getting out of the stock
strategy is the use of too soon. Set the Stop
Stop Losses to protect Loss too far away from
our downside risk and to the current price and
get us out of a stock at you run the risk of a
the right time. Just significant loss if the
about everyone stock’s price moves
understands the concept strongly against you.
of a Stop Loss setting.
This is where you set We set our Stop Losses
the price you are for one week at a time.
willing to sell (in the TurnerTrends has
case of long positions) developed a formula of
or where you are willing the maximum amount a
to cover (in the case of stock should move before
short positions). the close of the next
Friday. This formula
But, the real key to uses historical pricing
using this strategy is volatility, time, and
knowing what makes the the Friday closing price
best Stop Loss? Set the of the stock.
Stop Loss too close to
This formula tells us Let’s say that IBM just
that 68% of the time, a gave us a BUY signal and
stock’s price should not closed on this past
move more than a Friday at $89.75. Using
specific amount either our formulas, we
up or down from the calculate that IBM’s
Friday close. The result historical volatility is
of this calculation is 20% and its Expected
called the stock’s Move is $2.68.
Expected Move (EM).
This means that,
So, if we want to buy a statistically speaking,
stock and are willing to 68% of the time we can
suffer a maximum loss of expect that the price of
its EM, then we would IBM stock in the
set its Stop Loss at the upcoming week will trade
Friday closing price between a high of $92.43
less the Expected Move, and a low of $87.07.
less one cent. This
tells us that 68% of the So, if we decide to take
time this stock’s price a position in IBM, we
will not go below our would set our Stop Loss
Stop Loss for the at $87.06; just one cent
upcoming week. below its EM.
As we move forward in Then, when our Stop Loss
time, we adjust the Stop is triggered, the
Loss each week after we transaction generates a
have re-calculated its profit for the
EM. However, we do not portfolio
lower a Stop Loss (for
long positions), but *Note: Each week, we
only* raise it. At some perform a complete
point in the future, re-calculation of the
IBM’s share price will past three years of each
begin to trend downward. stock’s pricing history
When this trend begins, to determine the current
we will want our Stop HV (Historical
Loss to trigger a sale Volatility) and EM
of the stock so we can (Expected Move).
get out. Occasionally, this
re-calculation will
The goal of this process result in a lowering of
is to hold stocks long a Stop Loss, relative to
enough for them to the previous week’s Stop
achieve a Stop Loss Loss. But, this new Stop
setting that is higher Loss is NOT lowered from
(again for long the re-calculation of
positions) than our last week’s Stop Loss.
basis in those stocks.
