Eldar Bob’s Soft Stops

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Contributed by Sloper Eldar Bob: This soft stop method is probably not great for an account that is subject to the Wash Sale Rule.

Stops have frustrated me time and again.

Each morning, I start off with a list of positions and their dollar value. There is a list of short term long positions. Among those positions, I have used a different colored pen and put a box around those symbols which might turn against me. Likewise, I have put a box around the dollar size of the holdings which have a nominal value which is greater than my ideal position limit. I have also put a box around the nominal values of names to which I might want to add.

The second column is for short positions or short ETFs.

Then there is a third column of names worth considering for long term holds. It is usually a partial list of 10 to 15 holdings ranked from the largest positions down.

At the top of the college ruled notepad, there is a blank space. In the top left corner, I place the account’s net asset value which I update through the session. Updating provides a clear objective measure of success or failure.

It is not realistic to expect that the net asset value will increase each day. If the net asset value declines in a way that is alarming it is a call to decrease exposure.

The net asset value (NAV) must always be protected. One can come back from a 10% loss fairly easily, unless they have hit a dry run and keep throwing money at their ill timed purchases. A 20 percent loss becomes a bit of a bitch to recover from. And several times a year, I will close all of my short term positions, raise cash and step back.

Sometimes that may not be enough. At that point, I cull parts of my long term positions that are listed in the far third column on the right.

Managing the NAV is the most critical action of the day. A side benefit to this outlook is that one does not get caught up in their predictions for individual names. Individual names are part of a diversified whole. If I am over-weighted in a name for which I have great expectations, those expectations are secondary. And, in this no commission world, there is little slippage in buying back the shares. The big draw downs have to be avoided, if one wants to play.

With the NAV under control, one can gauge what is happening in individual securities. For example there are certain down bars that I will not hold unless they recover dramatically by a point near the close. You just want to avoid getting caught in that Slope of Hope. If it does recover, then your stop is the prior day’s low. A broader question to ask is: Is price under control? We all use measures for this from an analysis of trendlines, horizontal areas of accumulation and distribution Bollinger bands, average true range etc.

That is a second psychological advantage to one’s focus being on the NAV. Once the NAV is protected, one can look at a day’s price movement with greater objectivity. After all, you worked hard to get an entry price with an edge. If your judgment was correct, the position should be acting within the risk reward parameters.

And, that’s the framework of my soft stops.