Deploying “Stopped Out” Money

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The use of sell stops and re-investing monies you have been stopped out of as the market resumes its upward trend, has been the hot topic of the past few weeks. Reader Paul had this to add:

A few questions regarding your tactics for reentering the market with “stopped out” money:

1. Typically, what kicks off your decision to start reentering the market?
2. Do you only enter into funds that have a 0.0 %DD?
3. Assuming the trend remains positive, do you give yourself a target deadline for reinvesting all of your “stopped out” money?

For one, a resumption of upward momentum will always make me realize that I have been whip-sawed and cause me to re-deploy the proceeds such as happened early this week.

Second, depending on your risk aversion, you could wait until the funds/ETFs, you’ve been stopped out of, take out their old highs before re-entering. Or, you could select different funds/ETFs along the lines as I profiled back in July in “Using The Benefit Of Hindsight.”

Third, I don’t give myself a deadline for re-investing stopped out money but, if I see a rally building early in the morning, such as we had last Monday, I try to get back in as quickly as I can.

Keep in mind that trying to find a new entry point is not an exact science. You never know for sure if you’re making the right move at the right time. The idea is to get back onboard quickly if the trend goes your way. This also means that you need to quickly accept the fact that the stop point may have turned into a whip-saw by not dwelling on it.

That’s the moment in time to look at the big picture and remember that you are using stop losses for a reason, which is to limit downside risk.

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Comments 8

  1. Ulli,
    I understand there are two ways you can get whip-sawed. One is the big bang event in which the trend line crosses from buy-to-sell-to-buy.

    The other and more frequent one within the buy cycle is if your fund drops more than a certain percentage points stopping you out and then going back up through the old high prompting you to get back into the market.

    Can you give us an insight into any analysis you may have done to tell us whether it is beneficial to follow only the larger cycles or to follow the more frequent cycles within the 'buy' zone?

    In other words, is it better to just follow the trend line?

  2. I already own some funds where the most recent high was about 30 days ago and the funds have come down about 2.5 to 4%. If I want to use the 7% trailing stop rule, do I simply take 7% of the high 30 days ago and set that as the stop? And if I buy a fund now, do I still use the most recent high from 30 days ago or just from the price I just purchased the fund? Thank you for you newsletter and blog.

  3. I was considering a very similar question:

    Ulli, have you done, or can you do, a historical comparison of buying and selling a hand full of ETF/Funds with only the TTI buy/sell indicators against the more nuanced tracking that includes individual sell stops?

    Your TTI graphs (combined with recent whip-saws) have me wondering how going all-in at TTI Buy Signals and all-out at TTI Sell Signals would compare.

  4. Ulli,

    Going all out with no stops using your entry and exit dates long only going back several years always seems to yield an annualized compounded growth rate of somewhere around 8% to 10% using a few good funds and no stops.

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