Stop Losses: Planning to lose?
I am often asked why I don’t use stop losses – after all practically every financial adviser recommends them. Here’s what some say:
Charles Schwab: “A stop order can help protect profits and limit losses.”
Fidelity: Advises placing stop losses “to manage risk on volatile stocks or to limit downside exposure.”
Investopedia & FINRA: “Treat stop losses as essential tools for preserving capital in adverse markets.”
Mark Minervini, (Trade Like a Stock Market Wizard): “Always use a stop loss on every trade. Decide your stop loss before you enter.”
So – as with all ‘market wisdom’ let’s check it out and see if it holds up.
Where do I place the stop loss?
There are various recommendations. Schwab suggests 5% or 10% below your purchase price, Investopedia also recommends 10%, Fidelity suggest you exit on 10% gain / 5% loss, or 9% gain / 3% loss. Minervini advises limiting each position loss to around 0.5–2.5%,
Basically, you can take your pick. There is no reasoning behind the suggested figures other than they are nice round numbers and ‘investor tolerance’. You hit your stop, you sell. You have stopped further losses – but at what cost?
I'm out - what now?
OK, let’s say that your stock has dropped 2.5%, 7% or 10% (whatever you have decided it should be) and you’re out. What then?
Well Schwab and the other brokers are happy because they have collected commission, and you are forced to buy in again.
But where? And when?
This is where the advice tends to wither away.
Re-entry advice
Schwab | ❌ No guidance on when or how to re-enter. Focus is only on placing stop orders. |
Fidelity | ❌ No clear re-entry plan. Emphasizes stop-losses to protect capital; re-entry left vague. |
Investopedia | ⚠️ General suggestions like “wait for trend reversal” or “buy above resistance,” but no systematic rule. |
Minervini | ✅ Specific rules: wait for breakout above prior resistance or re-enter after price reclaims support with volume confirmation. Uses chart-based re-entries. |
Backtesting the unbacktestable
I would love to do a backtest on using stop losses – but without any clear guidance on when to re-enter it is not possible. I have tried applying these to SPY, but just got frustrated because the rules were not clear.
I mean ‘wait for trend reversal’ – how are we going to determine that? What are the criteria? Or ‘reclaim support with volume confirmation’ – exactly what does that mean? What level of support? What constitutes ‘volume confirmation’?
Some suggest getting back in when it has exceeded the price you got out at, but that ensures you are buying in at a higher price than you sold.
All we can say for sure is that if you hit your stop loss then you have locked in your loss even if it was just a normal stock market fluctuation.
Anchor Points
But overall how does using stop losses perform? It depends on when you bought in. Remember anchor points from last week? Here’s how we could use them.
There was a 10% reversal on 22 Feb 2022, which means:
- If you bought on 3 Jan 2021: Profit 16%
- If you bought on 3 Jan 2022: Loss 10%
Nailing Jelly to a Wall
That is how it feels when trying to prove or disprove the efficacy of having trailing stops. Without specific rules you can’t test so you have to rely on ‘market wisdom’ – which, as we have seen on many occasions isn’t very wise at all!
(Trailing stops: They don’t really differ from fixed ones – you are just adjusting them as you go.)
The market is not sentient.
The market doesn’t know and could not care less if you have lost 5% or 10%. The market does what the market does.
Stop trying to impose your rules on the market. Instead look at what the market is telling you – and sail with the tide. With ITM we have clearly defined entry and exit points so it is easy to backtest with certainty.
To the markets . .
Friday was dominated by the news on Israel / Iran – the markets predictably dipped, gold and oil went up. Was is a one-off? I’ve been listening to the news and it seems that this will not be over in a couple of days. If they are going to dismantle the nuclear capability, that’s not something that can be done overnight.
How bad was the dip? Not as bad as I expected, but we’ll look at the charts.
SPY Charts
You can see that the Friday candle was a doji – meaning that the market was undecided about direction. A doji reflects a psychological standoff between buyers and sellers. Neither side has gained control, showing hesitation, uncertainty, and a lack of conviction among traders.
The candle is resting on the 10 SMA, which is around $20 above the 200 SMA, so the golden cross is still in force and doesn’t look as though it is under threat even after Friday.
Of course, we must note that we are approaching a previous high (green dashed line) which may prove resistance.
The weekly chart has no surprises, and shows the hesitation at the 600 level.
SPYG Charts
SPYG was almost at the previous high in February, looking like it was going to pierce it, but the Friday news gave it second thoughts. Like SPY, it is now resting on the 10 day SMA.
The weekly chart shows that it hasn’t pierced the previous uptrend and it is acting as resistance.
QQQ Charts
QQQ is showing the same pattern as SPY. A doji on Friday, and slightly below the 10 SMA. The gap between the 10 and 200 SMAs is around $30 so a death cross is not on the immediate horizon. Like SPYG, QQQ is bumping up against the previous all-time high made in December last year and February this year – a double top. Will it get through this time? Let’s hope so.
QQQ is bumping up against the uptrend from the downside. Between the daily and weekly chart it is meeting quite a bit of resistance.
VIX Chart
Naturally the VIX has popped up again. Remember I said that it looked as though it was starting an uptrend from November last year? That increasingly looks like the case.
ITMeter
The week ahead . .
The Fed decision on interest rates is due out on Wednesday, and will (should?) be heavily influenced by the latest inflations figures which were announced last week:
Consumer Price Index (CPI) – May 2025 (Released June 12)
- Headline CPI (YoY): +3.3% (vs 3.4% expected)
- Core CPI (YoY): +3.4% (vs 3.5% expected)
- Month-over-Month: 0.0% — flat, indicating inflation paused in May
The figures were slightly lower than expected across the board, and markets read it as increasing the likelihood of Fed rate cuts.
Producer Price Index (PPI) – May 2025 (Released June 13)
- Headline PPI (YoY): +2.2% (vs 2.5% expected)
- Core PPI (YoY): +2.4% (vs 2.5% expected)
- Month-over-Month: −0.2% (vs +0.1% expected)
This was well below forecasts, suggesting wholesale inflation is easing. Both reports boosted rate cut expectations and traders increased bets on Fed easing later in 2025, possibly as soon as September.
BUT the M.E. situation. How that is going to affect the markets? I don’t know. I don’t really want to get into politics (it is such a minefield these days!) but I think that the odds are on Israel and that we may get a resolution quite shortly, although the situation will take a while to clear up. Just my thoughts, based on what I’ve read and heard, don’t take them as any sort of definitive information.
In any case, The Fed must give a decision on Wednesday. My guess is that Powell will hold rates steady so as not to be seen to be giving in to political pressure, but will make comments suggesting that they will be coming down soon. We have also got May retail sales and housing starts this week and a holiday on June 19th.
The futures
aren’t open yet. Will update this when they are.
This blog coming to you from . .
New York! And it is raining here too! I am starting to think the weather is picking on me. So instead of showing you a rainy New York I’ll show one of my last nights in England, staying at this fabulous castle hotel.
Called Hazlewood Castle, it dates from before 1066 (added onto over the years) . It has been in the same family (Vavasour) for all that time, so a lot is known about its history and the staff were very knowledgeable and showed me around.
Wonderful historic interiors – wallpaper made for Queen Victoria, 1600s wood panels in this room, and a monk’s hole that evidently goes several miles to the nearest village.
A chapel, beautiful grounds and a lily pond, of course.
And my favorite find – the original pre-1066 stairway in the centre of the castle – now being used as a broom closet!!
Fingers crossed for a good week!
Heather
Trade the tide,
not the waves
10 Responses
Heather,
What’s the max drawndown percentage of your bull ITM strategy? Thank you.
Hi Luan – there is not rule about maximum drawdowns – the entry and exit signals do not use max drawdowns.
Obviously, the drawdown on your account depends on when you entered, but you can easily see the max possible drawdowns by eyeballing the charts and assuming that you get in at the hig, then exit at the death cross.
h
Hi Heather,
The ITM trading system has a kind of built-in stop-loss — not through a broker’s stop-loss order, but by exiting when a death cross confirms. I totally get that it’s different, but still serves the purpose of limiting downside.
I recently came across a backtesting site that lets you simulate strategies based on SMA crossovers:
https://backalpha.com/strategies/crossover/spy/buy-sma10-above-sma200-percent0.3/sell-sma10-below-sma200-percent0.3/riskfree4.0/leverage2.0-timedecay2.0
I plugged in parameters that match what you described in your book *In the Money*:
– Buying deep ITM SPY call options at around 50% of stock price (2x leverage)
– Assuming 2% time value based on 1-year expirations (1% doesn’t seem realistic from what I saw)
– Entry on 10-day SMA crossing above the 200-day SMA by 0.3%
– Exit when it crosses back below by 0.3%
It also adds interest on idle cash using a risk-free rate — which makes sense these days with cash sweep programs earning ~4%.
The result it showed: 12.01% annualized return with a 38.11% max drawdown — noticeably better than SPY buy-and-hold at 10.37% return and 55.19% drawdown.
Just wondering — do those results align with the kind of backtest performance you’ve seen? Would love to hear your thoughts on it.
Best Regards,
Tyler Liu
Wow, Tyler, great find and thank you for posting it. I played around with a bunch of the parameters and Heather’s rules are spot on.
Hi JUmbert – I must check it out too – just I am restricted to a little laptop or an iPad, both of which are irritating to try to work on.
But if this is as good as it seems, I spent weeks and months on backtesting when I didn’t need to!
h
Hi Tyler
I am on holiday, and so don’t have access to my big screens and backtesting data. Your link looks interesting, I will try to check it out but I hate working on a silly little lapyop.
Re the 1% time value – at the original time of writing the 1% value was easy to get, but as interest rates increased so did the time value component – which is why in the later updates of the books I give the options of a 1% or 2% time value – the 1% often meaning you have to go for a 6 – 9 month expiry.
I can’t really remember exactly what I said, I don’t have the books with me.
But as soon as I get back (in August) I will be happy to check and share.
Thank you!
h
stop losses…
Market Makers will make sure your stop loss is triggered and go right down triggering until “ they “ decide to reverse “ the trend “ …
I guess you have to sell in strength and buy into weakness or “ blame Heather “
it’s only human to blame others
r
Hey Randy – I’m not sure that the market makers are quite that malevolent! They are too hidebound by the rules and restrictions placed on them.
But definitely the brokers and advisers are not angels.
And , yes, people often blame first and then work out later whether the blame went to the right person!
h
Dear Heather,
Speaking of New York, when will you be in Los Angeles? Happy Father’s Day To Everyone, especially to Presidents Trump/Biden/Obama/Bush/Clinton. Thank you for your services to the United States of America.
Sincerely,
George Henry
Hi George – not this time – it was a flying visit. Sailing out of NY tomorrow!
x
h