Use of stop loss limits for open portfolio positions

Stock Talk

Jim Pearce

Jim Pearce

A couple of you have asked about the stop loss price for Cal-Maine Foods (CALM), given the fact it briefly dipped below that level today. To clarify, I exercise stop loss limits based only on closing price since intra-day trading can be so volatile at times ("flash crash", etc.). In the event a stock closes below its stop loss price, I will issue a Sell Alert and close out that position in the Systematic Wealth portfolio. In the specific case of CALM, both yesterday and today it closed slightly above its stop loss price of $38 so no Sell Alert was triggered. However, given the fact that today was a pretty positive day for the stock market overall, I wouldn't be surprised if CALM closes below its stop loss price on the next big down day for the market so I do not recommend opening a position in it. However, if you have bought it and don't want to close out the position if/when the stop loss is triggered then please be aware that the next long term support level is around $35, so there should be another $3 or so of room on the downside if you want to give it more time to work out. We still like CALM from a long term perspective, but at the moment the entire egg industry is under heavy supply pressure so the stock probably won't see much upside momentum until there is greater equilibrium in that market.

RT

RT

Because of the volatility of intra-day trading, I understand that you don’t recommend using hard stop loss orders (unless SW raises the Stop Loss Level after a stock has risen above its Target Price). Instead, when the stock is below the ‘Stop Loss Level’ at close, you will issue a Sell Alert. When that occurs, is a ‘Market Order’ sell, the next morning, the best way to minimize loss?

Thanks, RT

Jim Pearce

Jim Pearce

Yes, I will issue a sell alert (at market) the day after a stock closes below its original stop loss level. I don’t know if that is necessarily the “best way” to minimize losses, but it is the way we do it to ensure that no one stock ends up blowing up our portfolio. We know a certain percentage of our recommendations will end up losing money (historically about 40%), but we also know that the winning trades have offset them by more than 2X so the key is to keep losses at a minimum.

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