Stop loss for ETF?

[TheUnknown]

Thinking of buying into one of the EFTS that is offered by Vanguard, which is this one https://www.vanguardinvestments.com.au/institutional/inst/investments/etfdetailVTS.jsp

This is a newbie question but what would you put the stop loss on this? % size of the account? I know everyone is different but don't know what to put stop loss on.

 

[skc]

Thinking of buying into one of the EFTS that is offered by Vanguard, which is this one https://www.vanguardinvestments.com.au/institutional/inst/investments/etfdetailVTS.jsp

This is a newbie question but what would you put the stop loss on this? % size of the account? I know everyone is different but don't know what to put stop loss on.

Doesn't matter whether it's ETF or ordinary shares or futures, your stop loss should be placed based on your risk management strategy. If you don't know where to put the stop loss, then you don't know (or don't have) a risk management plan.

Your risk managment plan should be unique to you. But in general it should encompass your original intent of making the investment, how much you are willing to lose, and how do you know you are wrong and hence exit the investment.

Think it through logically and your stop loss placement should come out of that process.

 

[Valued]

Doesn't matter whether it's ETF or ordinary shares or futures, your stop loss should be placed based on your risk management strategy. If you don't know where to put the stop loss, then you don't know (or don't have) a risk management plan.

Your risk managment plan should be unique to you. But in general it should encompass your original intent of making the investment, how much you are willing to lose, and how do you know you are wrong and hence exit the investment.

Think it through logically and your stop loss placement should come out of that process.

Imo you should analyse where your stop would need to be based on technical analysis (prior swing lows, support/resistance, selling climaxes etc) then assess whether your risk management plan can support the level of risk required for this trade rather than try to slam your risk management plan down the throat of each trade.

 

[skc]

Imo you should analyse where your stop would need to be based on technical analysis (prior swing lows, support/resistance, selling climaxes etc) then assess whether your risk management plan can support the level of risk required for this trade rather than try to slam your risk management plan down the throat of each trade.

I am unsure how to interpret what you mean by "slam your risk management plan down the throat of each trade"? Stop loss exists only because of your risk management plan. So without risk management plan you won't have a stop loss at all.

Your risk management plan is the over arching and integral to your trading/investment strategy. It contains statements like "I am buying because of price action. I am wrong when the last support is broken, and when I am wrong I exit the position". You take this framework and then you say "I will apply technical analysis to see where the support is so I know when I am wrong". Then everything else (like position size, stop loss level etc) falls below that.

Technical analysis is but one form of such analysis. The OP might decide to buy an ETF for long term exposure to a particular market, in which case his decision on any stop loss will be completely different.

 

[Valued]

I am unsure how to interpret what you mean by "slam your risk management plan down the throat of each trade"? Stop loss exists only because of your risk management plan. So without risk management plan you won't have a stop loss at all.

Your risk management plan is the over arching and integral to your trading/investment strategy. It contains statements like "I am buying because of price action. I am wrong when the last support is broken, and when I am wrong I exit the position". You take this framework and then you say "I will apply technical analysis to see where the support is so I know when I am wrong". Then everything else (like position size, stop loss level etc) falls below that.

Technical analysis is but one form of such analysis. The OP might decide to buy an ETF for long term exposure to a particular market, in which case his decision on any stop loss will be completely different.

Well let's say you are going to put 10k into a particular trade and you can only risk 5% of this being $500 (the reason for this example is unimportant). Well if you assess that support rests 7% below the current price then I would say if you can't afford to lose 7% and only can afford to lose 5% then you can't make that trade unless the price gets cheaper to fit within your risk profile. I think you should work out what your stop loss needs to be first for a trade then see if you can accept that level of risk.

 

[skc]

Well let's say you are going to put 10k into a particular trade and you can only risk 5% of this being $500 (the reason for this example is unimportant). Well if you assess that support rests 7% below the current price then I would say if you can't afford to lose 7% and only can afford to lose 5% then you can't make that trade unless the price gets cheaper to fit within your risk profile. I think you should work out what your stop loss needs to be first for a trade then see if you can accept that level of risk.

Or you just put $7k into the position instead...

Anyway, I classify everything you've described above as under the umbrella of a risk management plan... and when you do the steps exactly as you described above, you are not "slamming" the risk management plan on the trade, you are simply applying your risk management plan.

Anyway - it's probably just semantics.

 

[CanOz]

Considering the OP has selected this ETF, was this taken into consideration?

Who it may suit

investors with a minimum time horizon of 7 years
investors seeking long-term capital growth and with an appropriate tolerance for the risks associated with share market investing
investors seeking to add diversification by investing overseas
investors using a core-satellite strategy seeking an index fund for the core of their international shares portfolio

So at what point do you pull the pin, when is it that you cannot take the pain of loss anymore? 20%, 30%....50%??

In a 7 year time frame, I'm guessing this ETF had some pretty good draw-downs.

 

[TheUnknown]

Considering the OP has selected this ETF, was this taken into consideration?



So at what point do you pull the pin, when is it that you cannot take the pain of loss anymore? 20%, 30%....50%??

In a 7 year time frame, I'm guessing this ETF had some pretty good draw-downs.

Exactly, what would you put it at I was thinking at around 15%. But even then you might get stopped out and then it will bounce back again?

 

[CanOz]

Exactly, what would you put it at I was thinking at around 15%. But even then you might get stopped out and then it will bounce back again?

Here is the chart...

The ETF has not yet been funded for 7 years, it started in 2009 and it has seen a 23% draw-down already....

Since then it has not seen a drawdown that severe, thats 3 years ago....10% drawdowns are quite common though.

Are you able to withstand one draw-down of 23% and several of 5-15%?

Thats a 100MA on the chart by the way...

 

[TheUnknown]

Wow didn't really see that its had that big of a draw down. Was looking at this years return what a stunner return it has done I know past performance is nothing much to go by but...had confidence in it until I seen this DD.

You can never win.

 

[CanOz]

Wow didn't really see that its had that big of a draw down. Was looking at this years return what a stunner return it has done I know past performance is nothing much to go by but...had confidence in it until I seen this DD.

You can never win.

You can win, for sure. You just need to be sure of what to expect when trading or investing. You need to know your tolerance for pain...

Once you know this, you can then find out what the historical performance of a system or ETF is and then you'll at least know if the risk matches your risk tolerance. If it doesn't then pick another asset class because sure as rain as soon as you exit after a painful draw-down the asset will experience its best run ever!

When investing or trading you need to know these things so that you can commit, but still have an exit plan.