Does Formula Stocks have a stop-loss system?

No. Formula Stocks does not provide or recommend setting a stop-loss value.

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be take advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down. - Benjamin Graham
Our strategy dynamically tries to figure out the best time to sell a stock based on financials. It is much better at managing and evaluating risk than any hard-coded stop-loss system we have tried.

Since human investors have to deal with emotions, it is normal to try to control those emotions is by following a static stop-loss. E.g. -10% (if a stock drops 10% in value, no matter what you sell it). However algorithms don't have to worry about emotions at all, instead it analyzes the risk to figure out if it statistically makes sense to keep holding onto the stock, or sell off and take the loss.

Let's say a stock price drops 20% in value in a single day, because of speculations that something will happen, or a scandal about the CEO. Sometimes these events have absolutely nothing to do with the future profitability of the company or its financial situation. The stock might very well drop in price, but if it's still a financially sound investment with a very high probability of future outperformance. The system will keep holding it.

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgement. - Benjamin Graham

The following emotional scenario is all to common in stock trading:



Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market. - Warren Buffett

The #1 priority of our strategy it evaluation risk vs reward based on finances, not news. It is a big factor in our success, and it is almost certain that some of our stock picks will drop significantly in value at some point.

Updated on: 10/08/2021