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Since we are generally longer-term investors, we use 1 or 2, or a combination of both such as 1 for initial stop, and then 2 for trailing stop once position has moved significantly into profit. Just use what you feel most comfortable with.
According to William O'Neill of CANSLIM and Investor's Business Daily fame, a stop of 8% is more than adequate. However, be aware of different volatility of particular stocks and use your judgement. Also make sure at least that your initial stop is further away from price. Experiment, and discover your own tolerance for risk.
An unusual system for placing stops I had some success with was to use long-term average S&P annual gain of 11% and multiply it by stock's beta, if beta is greater than 1. Round this number up or down. Simplistic but effective. If a stock has a beta less than 1, just use 11%. CRDN has, as of 07/07, a beta of 1.307. The stop, if we were buying today would be 11*1.307 or 14%.
14% my seem like a lot to lose, if stock falls after you buy it and hits stop; in a diverse portfolio, this will not happen too often and you will be protected from having to make a 100% gain to break even. Most discount brokerages allow percentage trailing stops nowadays, and may not even charge for them, giving you peace of mind for free.
(c) 2005 The Graham Investor - Value Investing You may use this article, as-is, provided this copyright notice is kept intact.
John B. Keown is an IT specialist, website builder and private investor who enjoys all things stock-related and in particular seeking out undervalued stocks. He can be contacted via http://www.grahaminvestor.com