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<Does anyone have a rule of thumb or rational basis for establishing a "cushion" to be allowed when setting a stop-loss order...>

I buy a stock when there are good fundamental reasons for owning it and sell it when those reasons no longer exist. If I believed in stop-loss, I would have sold my REITs just in time to miss one of their greatest rallies ever. To me, a stop-loss order is like selling only when someone is willing to pay a low enough price, kind of like selling to the lowest bidder. If you have truly done your homework and stay on top of things, it is crazy to succumb to random noise in the stock market. Presumably you selected the stock in the first place because you had some confidence in beating out the mob.

Jim makes a good point about trying to filter out the noise by basing stop-loss on standard deviations, but for a normal distribution, the standard deviation gets statistically exceeded on the down side roughly 16% of the time. I suppose you could opt for two standard deviations, but why bother?

There is an interesting statistic on today's Yahoo Finance page ( It says that according to an Ibboston Associates study, the annual return on U.S. stocks varied, on average, from the long-term average by 20% for the period 1926-1997. According to Morningstar, the trailing 3-year monthly standard deviation of the S&P 500 index was 16%, close to 15% for the Morgan Stanley REIT index. Those numbers are for indices, not single stocks.

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