Stan Weinstein’s Stop Loss Strategy is a great way to limit your losses. If you want long term trading and investing success having a stop loss strategy like Stan Weinstein’s is critical. So where did his stop loss strategy come from?
In his book “Secrets For Profiting In Bull and Bear Markets” Weinstein shares a stop loss strategy that is worth review.
And by the way…
As you might know, we already discussed the topic of when to sell stocks, in another recent blog post here at stockideas.org. But since I just discovered Weinstein’s stop loss strategy I really wanted to share it with you. I’m reading the book right now and just finished the stop loss strategy chapter the other day.
So let’s get into it…
The Best Part About Stan Weinstein’s Stop Loss Strategy:
My favourite part about Stain Weinstein’s Stop Loss Strategy is that he clearly differentiates between how traders and investors should approach buying and selling stocks. This might sound like a simple distinction. But trust me, it’s something most authors gloss over. And it goes a long way to helping you get value out of his stop loss strategy.
I really can’t emphasize this point enough. When you’re buying stock you need to know how long you’ll hold it. And differentiating between investing and trading is the essential first step. Got it? If you’re still a bit fuzzy read the post about how to figure out when to sell a stock.
Now let’s hear what Weinstein has to say on the topic…
Stain Weinstein’s Stop Loss Strategy for Investors:
Stain Weinstein’s Stop Loss Strategy for Investors is easy to follow and implement. You’ll have no trouble following the advice from Weinstein’s book “Secrets for Profiting in Bull and Bear Markets.” So here’s how it works…
First here’s where you buy stocks according to Weinstein’s strategy:
Weinstein recommends you buy stocks that are emerging from consolidation patterns. When the stock is breaking out of the recent trading range (and if it does so on high volume with strength relative to the market indices) then you can buy a 1/2 or 1/3 position. Weinstein recommends buying the breakout because stocks don’t always pull back.
Next, wait for the stock to keep breaking until it starts to retrace. Sometimes the stock will sell off back to the initial breakout. Other times it will find support and put in a higher low above the consolidation pattern (and initial breakout). Weinstein’s buying strategy for investors recommends that you buy another 1/2 or 1/3 position here when price comes back up on volume after the first higher low. Make sense?
Now here’s Stan Weinstein’s Stop Loss Strategy For Investors:
Weinstein recommends that you put your stop loss about 7-10% below your entry AND at a point where the stock has fallen below the bottom of the consolidation pattern. This approach encourages you to find tighter consolidation patterns (which Weinstein describes as more bullish).
If your stock continues to break out, Weinstein recommends moving your stop loss up, and selling your stock in 1/2 and 1/3 positions. First, keep the stop loss just below the 30 week moving average, and sell 1/2 or 1/3 of your stock position when the stock cuts through here. Then, if there is a trendline that is supporting the stock higher you can sell another 1/2 of the stock when the trendline breaks. This stop loss strategy protects your capital and is really important to protecting your stock positions.
I really like the way Weinstein focuses on two criteria. The point is to keep your loss small, but give your idea time and space to work. You need to be honest with yourself up front though and pick reasonable stop losses.
Now here’s how traders can use stop losses…
Stain Weinstein’s Stop Loss Strategy For Traders
Stain Weinstein’s Stop Loss Strategy For Traders is like a one-shot-only version of the trading strategy for investors above. Weinstein assumes that traders are putting on whole positions at once and looking to make quick bang for the buck – that’s pretty reasonable to assume right?
So Weinstein recommends that you do one of the following as a trading stop loss strategy…
(1) Trades should work out quickly. So put your stop loss below the nearest correction low before the breakout.
OR, if there isn’t a nearby correction low in the consolidation pattern that you can place your stop loss under, THEN:
(2) Understand that good trades usually work quickly and move with strength. So if your stock pulls back more than 4-6% you should cut your loss. When you play with a full position out of the gate you need to protect your capital and cut losers quickly.
By The Way: In this part of the strategy Weinstein also advises that investors NEVER use only a % stop loss in their stop loss strategy. He says you need to consider the bigger picture.
Finally, if your stock does break out then you should move your stop loss up. If it retraces more than 7% you should sell it. Otherwise just keep moving it up 1 or 2% below the prior correction low.
Does that approach make sense?
With traders I think it’s pretty clear cut… Just keep your losses small and let your winners run.
In both cases, Weinstein’s strategy reminds us that it’s important to be able to admit that you are going to be wrong. Nobody is right 100% of the time. And you can tie up your money and sustain significant capital losses if you aren’t willing to take your head out of the sand. Seriously! But hopefully this review of Stain Weinstein’s Stop Loss Strategy has helped. If you’re looking for more advice you should definitely check out his book.
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