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