Trailing Stop Discipline: How to Know When to Sell Your Stocks
by Alexander Green, Advisory Panelist
Tuesday, September 8, 2009: Issue #1087
Part of any investor’s success has to come from knowing what to buy. Another major factor is knowing when to sell.
And that, quite frankly, is the result of keeping our trailing stop discipline.
Whenever a recommended stock closes 25% below its closing high – or our original recommended price – we sell, no questions asked…
Why do we do this? Number one, a stock trader needs to have a sell discipline or he’s simply flying by the seat of his pants. Anyone can plunk for a few shares. But getting out at the right time is the true art of investing.
Your timing will never be perfect, of course. No investment system devised will ever beat the uncanny success of hindsight.
But the key is to always cut your losses and let your profits run. Easier said than done, however…
Using Trailing Stops to Overcome Emotion and Second-Guessing
Emotions like fear and greed (and hope) often get in the way. Even professional investors and money managers are prone to rationalizing.
But using a trailing stop enforces a discipline that takes the emotion – and the second-guessing – out of the investment process. Prices reflect the facts about a company better than individual opinions. So we don’t argue with the market.
However, some investors tell me they are just too busy to keep up with the trailing stops on their stocks. This makes no sense. It’s tantamount to a driver telling you he doesn’t have time to keep his eyes on the road.
Fortunately, Richard Smith, President and Founder of Tradestops.com – and a PhD in mathematics – has a solution…
A Foolproof Sell Alert Service
Tradestops specializes in helping individual investors protect their profits and investment capital.
The service is straightforward. On the site you can enter the stocks you own, your price paid and the percentage trailing stop you want to use.
If any of your stocks close beneath your selected stop, Tradestops sends you a text message – to your cell phone, e-mail account, or page – alerting you.
Tradestops not only covers all three major U.S. exchanges, but London and Toronto, as well. It can even alert you to stops on your mutual funds and option positions.
Some firms, like Fidelity, offer trailing stop alerts with their accounts. But they generally expire after 30 or 60 days. TradeStops’ information never expires. It’s important to note, though, that Tradestops notifies you, not your broker. It does not enter sell orders.
Personally, I prefer it this way. Anyone who has seen “2001: A Space Odyssey” doesn’t want HAL taking over their account trading.
With Tradestops:
- You can track up to 50 stocks at a time (and whenever you stop out of one, you can replace it with another).
- Tradestops even offers a 30-day risk-free trial.
- Tradestops is easy to use (it’s specifically designed for technophobes) and it’s reasonably priced.
- Ordinarily, the cost is $7.95 a month or $79.50 a year. There are also additional services available for dedicated short-term traders who want even more.
For complete information, feel free to visit: www.Tradestops.com.
And, remember, if you own individual stocks, trailing stops are essential. They don’t just help cut your losses and let your profits run… they guarantee it.
Good investing,
Alex
Any investment contains risk. Please see our disclaimer.
5 Responses to “Trailing Stop Discipline: How to Know When to Sell Your Stocks”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
25% is OK for volatile stocks so you don’t get whipsawed but for larger cap stocks that are less volatile I would think a lower % would be more appropriate.
Shouldn’t the stop be related to the volatility of the stock?
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Yes the stop should be related to the volatility of the stock?
In commodities markets many use Welles Wilders parabolic stop which does exactly what you say.
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First, let me say I agree 100% with the idea
of disciplined, automatically-activated stops.
As part of my ongoing “self-education” I have
been experimenting and I think the topic needs
more scientific method. Specifically, wouldn’t
it make sense that the more historically volatile
a stock, the wider its trailing stop should be?
Or, as a stock is approaching its target, that
the stop might need to be narrowed?
I realize that 25% is a good “rule of thumb”, but
it seems to me that there may be times that you
should narrow it, capturing more of your gain, and
other times that you should widen it, so you don’t
stop out prematurely. Alex, can you give this
some thought and talk about it in your future
articles? I bet I’m not the only one who has
stopped-out, only to lose a real opportunity,
or bought a stock that never gained 25% and then
stopped-out for a loss. Is there any way to bring
more science to bear on this important topic?
Thanks again for all you do.
Regards, Chuck
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I’m just getting started with trailing stops. I put all at 10% and am concerned that I may get into some unwanted sales. Can someone buy only 1-2 shares or do they have to buy all shares offered?
Thanks, Glenn
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Chuck take a look at new concepts in technical trading to see research into trailing stops. It depends on how much back testing you want to do to optimize your stops. It is no big deal to get back in when you are stopped out of you are running them to tight.
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