Fixed Stop System
If you dislike the idea of using such small stop losses on your positions, you can increase the risk by using the Fixed Stop method. It’s a simple, static derivative of the Stop Loss System. In this method, you essentially throw out the use of the ATR and instead use the amount you’re willing to risk in any given position to determine the size of your stop. The stop losses in this method tend to be rather large; therefore, this method is best to use if you’re a long-term investor who follows big trends over months or years. (See Table 1.12)
Stock | Position Size | Price | Shares | Risk | Stop |
SPY | 5000 | 145.85 | 34 | 1000 | 29.17 |
RIMM | 5000 | 107.57 | 46 | 1000 | 21.51 |
GOOG | 5000 | 633.63 | 8 | 1000 | 126.73 |
MSFT | 5000 | 34.09 | 147 | 1000 | 6.82 |
BIDU | 5000 | 314.99 | 16 | 1000 | 63.00 |
DRYS | 5000 | 89.11 | 56 | 1000 | 17.82 |
IBM | 5000 | 104.79 | 48 | 1000 | 20.96 |
C | 5000 | 34.00 | 147 | 1000 | 6.80 |
EMC | 5000 | 19.64 | 255 | 1000 | 3.93 |
XOM | 5000 | 85.10 | 59 | 1000 | 17.02 |
Figure 1. 12 – Fixed Stops
Note that you’re calculating the size of the stop when using the Fixed Stop method. The risk across all positions remains the same at 2 percent of the account equity ($50,000). The total of the risk across all positions adds up to 20 percent of the account, or $10,000. This is a large amount of risk to be taking. But if you’re comfortable with it and have an overall strategy that fits with the Fixed Stop method, then you can use it.
The Fixed Stop method is easily customizable. You simply need to adjust for the account size you’re working with, the risk per position you’re comfortable with, and the number of positions you can carry.
That’s it for the Fixed Stop Method. As such we’ll leave it and focus on the Stop Loss System since it’s more dynamic and consequently better. We’ll take a look at many examples of how the Stop Loss System works in real time, using the same ten stocks in the previous examples.