We’ve all seen fortunes made.
Unfortunately, we’ve also seen fortunes lost in a matter of seconds.
To this day, one of the biggest reasons for sizable losses is failure to protect profits and cut losses timely with tools, such as the trailing stop loss. But we have to realize that without any kind of exit strategy in place, emotions could come into play.
Then, emotional trading can get us all into trouble, forcing us to buy or sell at the wrong time.
We’ve all heard the phrase, “Sell your losers, and let your winners run.”
It’s as straightforward as you can get.
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Of course, we want to get rid out of losses. But just how do we safely let our winners run? One of the easiest ways, which also removes emotion from all trades is the trailing stop loss order placed when you first buy a stock.
Simply put, the order is to sell a stock once it falls to a certain price (such as if the stock falls to $10) or at a percentage (such as if the stock falls 10%). It’s your safety net should the stock begin to reverse unexpectedly in the wrong direction.
It’s designed to limit your loss on a trade while simultaneously allowing the stock to run even higher. And the order will only execute if the stock drops. For example, the trailing stop will reset at higher prices and percentages if the stock price increases. It never resets if the stock price falls.
Let’s say you bought stock ABC with a 10% trailing stop loss from a $25 entry price. Should the stock fall $2.50 to $22.50, the stop loss will trigger. However, should the stock move to $26, the stop loss would be reset at 10% of $26, or $2.60 a share.
As an example, let’s look at Apple (AAPL), which traded at $140.
If you own 100 shares, you want to stay in the stock as long as it doesn’t fall 5% lower. So you’d set up a trailing stop at 5%. If Apple trades no higher than $140, the automatic trailing stop-loss would be set at $133 a share. Now, should Apple run to $160 a share, the trailing stop would increase to $152 a share.
There you have it. A simple investment technique that could lower your risk, prevent potential losses, and protect your money without emotion. Take advantage of the trailing stop loss order, but be careful not to set it too low – you wouldn’t want to miss big profit opportunities because your stock sold at a temporary low.
Before you enter any trade, always lay out your game plan. Pre-determine your exit strategy before you actually place the trade. Failure to do so will open you up to potentially big losses.
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