Trailing Stops

Trailing Stops – How I Track Them And How You Should, Too

By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Tuesday, November 23, 2004: Issue #389

My two basic rules for consistent investment success are as follows:

Buy something of extraordinary value when nobody else wants it.
Don’t lose money – use trailing stops.

Good investors concentrate their time looking for #1 above. But great investors concentrate on both #1 and #2.

“Don’t lose money” sounds flippant. But it is tricky business. A good money manager can’t just buy smart he’s got to sell smart too. It is my opinion that most investors – even professionals – don’t have a clue when to get out when they get into a position.

Today, I’ll show you a simple “worst-case” rule for when to get out – using trailing stops. And then I’ll show you the software that I use to track my trailing stops myself. It’s inexpensive, easy to use, very good and free to try. You ought to give it a shot

Why Use Trailing Stops

People don’t have a plan to get out of an investment. So they risk being stuck in a position where a stock they own is down 50% and they need it to rise by 100% just to get back to break even. Only the stock continues to fall

They may even find themselves in a position where a stock has fallen by 90%. But by the time it’s down 90%, it has to rise by 900% just to get back to break even. That’s asking a lot.

What I mean when I say “don’t lose money” is: “Don’t put yourself in a position for a catastrophic loss.” You can generally avoid being down 50%, or 90%, with a simple strategy I recommend to Investment U readers.

The simple strategy is called a trailing stop. As a very rough rule of thumb, I recommend a 25% trailing stop strategy. Here’s how trailing stops works:

Let’s say you buy a stock at $10, and it rises to $20. If it falls by 25% down to $15, you sell, no matter what. It is a way to know when to sell your stocks and let your winners ride. It is an excellent last-gasp “safety” to get you out of a loser that you don’t recognize (or aren’t yet willing to recognize) as a loser.

I make a point to always set my exit points right when I decide to buy something. Now it’s easy to tell you this. But it’s another thing to try and track it

The Software I Use to Track My Trailing Stops

Let me tell you, I’ve tried everything. You can’t imagine the investment services I’ve subscribed to. I’ve used services that can and do run upwards of $20,000 a year (including Bloomberg, and Ned Davis Research, for example)

But what I use to keep track of my trailing stops is a tiny little program called XLQ Companion. Here’s a screen shot from my own computer that I use to track the trailing stops:

trailing stop tracking software screenshot

The right column above tells how far below the closing high the stock is. That’s how I track my trailing stops. Fortunately for me, nearly everything in the newsletter is near its highs. (The lone exception is Anworth, where I use a different exit strategy than a 25% trailing stop.)

XLQ Companion comes with XLQ Plus, an exceptional software package that allows you to use Excel to do just about whatever you need to track your stocks and portfolios.

I think the creator of XLQ Companion envisioned it as a total portfolio management program. You can use it for that. But I just use my brokerage account as my portfolio tracking page, and I use XLQ Companion just for my trailing stops.

Beyond the little XLQ Companion program, the actual XLQ program is phenomenal. XLQ is an amazing creation that allows you to manipulate stock data in Excel. I use it for research and for tracking my stocks, their fundamentals, and whether they’re above or below their moving averages right now. Every time I open Excel, all the data and formulas are updated. Former Investment U Vice President Brian Hunt uses the Average True Range function of XLQ as part of his Microcap Moonshots research. It’s really valuable.

Again, I’ve used services that cost tens of thousands of dollars a year. And this little program for about $100 links better and faster to Excel than any of them.

As for tracking trailing stops, there really isn’t any competition out there yet. Of course, I think it’s great, in part because I helped develop it. (The genius behind XLQ was open to my ideas, and created XLQ Companion to serve readers like you.)

In short, XLQ could help you be a better investor. Right now it’s free to try for 45 days. If you’ve had a hard time in the past tracking your trailing stops, check it out at: http://www.qmatix.com/XLQ.htm

Good investing,

Steve

P.S. Follow the link for a recent report on Trailing Stops by Investment U’s Chief Investment Strategist, Alexander Green.

Today’s Investment U Cribsheet

A few additional notes:

1) You don’t need to have Excel to have XLQ Companion keep track of your trailing stops.

2) You will have to put in your stock symbols and the date and price you bought at, of course.

3) Leo, the developer, is very good at answering questions by e-mail. Try and solve any problems using his website first, and then send him an e-mail.