Hello!
I've started training in investing in stocks (european and a few american ones) through a virtual portfolio and was wondering how do professionals fix their stop losses for mid-term investments (like 3-4months).
I've invested in great companies with solid fundamentals that have suffered from the Covid crisis but which I believe are still undervalued (I invested in Bnp, Orange, Engie, EDF, Avaya Holdings) and shorted some that I think have one foot in the grave (Air France, Icade..).
My question may be vague but how do you know when to cut your losses? For example there are many of my long stocks with -7% and more.
I'm a macro guy and I'm quite bullish for my investment horizon (I'm not expecting +20% on my portfolio tho) but I don't know when to stop taking losses and just sell it.
For example I believe BNP could go for €42 by mid september, however I entered at 37.9 (I know my entry point was rubbish) and now it's at 34.8, so for now I'm 8% in the red....
What is the point at which you just say fuck it and start believing you better sell now because the 42 you're waiting for will come in 6 months and not 3?
Thanks, hahaha at least that shit makes me better at managing stress cuz gosh it's hard to keep from selling and dumping everything in US tech instead hahaha.
First thing - do you have established position sizes and limits to your portfolio? If not - start there. that applies whether you are trading or investing with the dollars. For your paper trading account, I'd do nice and round numbers - 2% initial up to 10% max (in one name) - or something like that. If you are trading - this is absolutely essential in my opinion. What often happens is that beginners oversize their position, get into trouble, then either A. hold too long or B. keep adding until they suddenly have massive losses without even realizing how large a position it is. It also helps with conviction, risk management, etc, etc. You are in effect establishing risk limits this way vs. having no barometer as you do now.
Second - define, clearly, what your thesis is when entering a trade or investment. Write it down - pin it on a board - whatever. It should roughly match with a time horizon. Given how you describe what you are doing - this is probably primarily fundamental to the company with a macro economic consideration...and just overall market issues (i.e. is it thinly traded? heavily shorted? maybe highly correlated to overall market?) could impact it. I can't stress this enough - and if you do nothing else, do this. If you are a "fundamental" investor this is everything. The valuation and then the catalyst for that valuation being realized in the market is so important.
Third - be honest with yourself about your risk tolerance and your conviction to the above thesis. This should drive your position sizing, time horizon and outlook in many cases. Re-evaluate whenever you have price movements, market changes, new news, etc.
Those are just a few very basic things that you should be doing, or may already be doing. If you are trading - establishing a process is the most vital thing you can do. It's the only thing you can do, along with being disciplined.
so as an example - with BNP - if that's a properly sized position you'll have put 1% as an initial buy into the position, which moved against you. Re-evaluate your thesis - if nothing has changed, you should add another 1% (or whatever) as why wouldn't you? You just got handed a bargain. If it has changed - or you aren't sure that your thesis still holds - cut the position and move onto another idea.
Again - I want to stress this - never turn a trade into an investment and vice versa. Also don't get too hung up on the .9's on pricing in a paper portfolio - you want to build a process, define how you do things and, importantly, screw up a lot.
Thanks man, I already have a "method" to pick my longs and shorts (basically macro top down, then financial fundamentals to pick individual stocks). My max position until now was about 8 or 9%, and I picked a dozen stocks (they have mostly the same weights apart from some exceptions). I picked only a few stocks cause I read in my portfolio construction theory course that 15 stocks already achieved good diversification (I picked 10-12 cause I didn't find more good buys in France considering the brokers fees are made higher for international stocks).
I haven't changed my views on the stocks I picked except a few like Airbus (I believe it's good but just that it would take more time than my investment horizon). For you should I stick to my stocks as long as I believe in their potential even if I have to go 20% in the red along the way? My big problem isn't really me not believing in my stocks' potential, I feel it's more about me worrying it will achieve them in 6 months instead of 3.
I don't see why you are limiting yourself to a time horizon in your case - when you are looking at heavy fundamentals you need to give yourself room to let those things 'reflect' in the prices.
If you don't need the cash, and can handle the draw downs, why would you punt it? You don't have redemptions, etc. you need to fund.
I don't know it feels more challenging to work under constraint. I'm sure you could buy almost anything in june 2020 and make a profit by 2021 or 2022 taking into account how hard some very solid companies have been hit in march.
Right - again, I think you need to separate your investment portfolio from your trading portfolio. Traders aren't worrying about building well diversified portfolios of stocks - they are worried about what is moving, why is it moving and how can I get in (and more importantly, out) at a profit, etc.
Stop 'worrying' about whether it will hit, and evaluate why you think it will or won't get there. Again - even if it's undervalued, if the catalyst is no longer there to push it to 42 - then wait for a green day, and punt it. You are trading - you will take losses. If you are sizing correctly, and constantly evaluating your positions, you should be able to get in and out properly.
Trading is extremely process and discipline oriented. You have to be clinical. Sure - there's the guys who swing it around, and make $100 million on Natty gas futures... that's well and good, but the majority are eeking out small profits consistently over time. Focus on building that out,. If you are investing - again - that's going to be a different set of considerations.
I see thanks :) !
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