Monday, September 22, 2008

Lock in Profits with a Trailing Stop

One way of protecting you stock purchase is with a stop order, also known as a stop-loss. This is a standing sell order where your broker will sell your stock at a price (the stop) that you specify if it drops to that.

A variant is the trailing stop order. This type of stop-loss "follows" behind the stock price at a specified amount or percentage and increases as the stock price increases. For example, if you have a 5 percent trailing stop, the price at which the stock is sold is 5 percent less than its highest peak and not 5 percent behind the purchase price.

This is a good way to lock in profits as your stock rises and a good way to cut your losses if it turns south. Too tight of a stop on a wildly fluctuating stock might cause your stop to be executed too soon and too loose of a stop may cause extra losses.

I generally don't go more than 5 percent on a stop order while some people on a pretty stable equity might go as little as 3 percent. It's up to your risk tolerance and the volatility of the stock that you have purchased.

Have a good one,
Roger

2 comments:

  1. I know I'm asking you a bunch of questions, but to clarify, do you yourself tend to use a stop, or a trailing stop? You mention both, but your personal preference is not clear.

    ReplyDelete
  2. Stops are a must. I prefer a trailing stop when the run up is strong, and the equity is not a wild mover. Otherwise I put in a plain stop of 10% and selectively raise the stop price as the equity gains.

    ReplyDelete