Stop Loss

i think it can only make sense with discussing stop loss quantum, when viewed from a bigger picture...

the common Stop Loss Exit methods:

a) Long stock $1, stock drops x% => exit
b) Long stock at $1, willing to lose 50cents, stock drops 50% => exit
c) allocate $1 to purchase stock, buy and hold, as long as stock doesn't drop to $0, => no exit (% portfolio theory)

and perhaps there are other variations to the above....

whichever the method stipulated above and the variations to them, it is incomplete until the trader/investor also considers the chances potential rewards... let me elaborate...

take for example, GE shares....in the 2 years between 2005 and 2006, the price gyrated something between $33 - 37 (give and take a few cents)...and we are now in 2007, not knowing where the price will head too, except that i am convinced GE is a great investment and I buy some ... now, do I adopt a), b) or c) stop loss exit plan? the answer really can be a), b) or c).

but i am suggesting that it is not a comprehensive trading approach to choose any of the above conventional methods, without considering the Historical Volatility (HV) of GE price. clearly, GE price exhibited very low HV, something like <7% annualized in 2005 and 2006.

now, does it make sense to adopt :

A) 10% loss exit when GE drops by 10% in price?
B) losses of ~$17 per GE share, which represents 8.7456% of your total investment capital
C) willingness to accept the risk of losing all of ~$35/share of GE (% portfolio theory)

to me, this is how i rationalize the following options above :

A) GE shows me that it has only a ~7% historical volatility...why would i be willing to lose 10% of the share price, when the possibility of making at least 10% is not statistically present? it's foolish to adopt this stop loss option

B) just becos I am willing to lose 8.7456% of my total investment, doesn't mean I need to structure my trade that allows for this possibility, when the investment shows me no reason that it can give me more than $17/share of potential profits. unless, i truly believe hat GE can approach it's "dot.com" high of ~$60/share, i should be aware of my chances of making that potential profit, and risking no more than that amount...

C) again, just becos I allocate 2% of my capital to buy $35/share of GE, doesn't mean I need to allow myself to lose all of that 2%.... % portfolio allocation theory is NOT even a Stop Loss Methodology.... it's for those with no idea how to invest their money except to defray their capital and hope for the best ....