I've received quite a few emails from subscribers about the idea of trailing stop losses. I'm glad that they've sent them -- I always appreciate feedback from readers, and I try to personally respond to as many emails as possible.
A few readers have expressed the feeling that I haven't fully explained this valuable tool, and why I'm such a big proponent.
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That's what I want to address today.
Buying Is Only Half The Battle
As I've said countless times before, in order to become a successful investor, you need to have an exit strategy. Buying stocks is easy. There are thousands of strategies, indicators or theories out there on what, why and when to buy. But that's only half the equation when it comes to making money.
We've all made expensive mistakes before, whether by missing the full upside of a stock by selling too soon or taking a huge loss by holding a falling stock too long.
The ironic thing is that most people put enormous amounts of time and effort researching an investment to buy, yet they don't give the sell side of the equation any thought. That needs to change. The same sort of due diligence that goes into buying a stock should go into when to sell.
Of course, that's the beauty of my premium Maximum Profit system -- it gives us clear buy and sell signals for each stock in our portfolio.
But what about your other holdings?
The truth is, you should also have a plan in place that forces you to methodically cut your losses and let your winners ride. It may be more difficult without a proven system in your corner, but it's certainly doable with a little discipline.
That's where a trailing stop-loss comes into play.
The Trailing Stop-Loss
Last fall, I implemented a 15% trailing stop-loss across the board for my Maximum Profit portfolio. This was different from our normal sell signal, which is based on a proven momentum indicator -- and has worked very well for us since the inception of my newsletter. But I was getting increasingly wary of this extended bull market, and it's always good to have a backup exit plan in place -- even if it proved to be redundant more often than not.
I wanted to keep as much of our profits as possible. I also wanted to give my readers some course of action in the event that one or more of our stocks went into freefall.
The basic premise of the 15% trailing stop-loss is to sell any position that falls 15% off its highs. And I believe that a trailing stop-loss should be a part of any investing strategy, whether we're talking about Maximum Profit holdings or stocks you hold outside of this newsletter.
Many of my readers have asked, "Why 15%?"
To be honest, there's nothing magical about the 15% number. It's really the discipline that matters. Your trailing stop-loss can actually fluctuate depending on the investment. For example, some traders use a trailing stop-loss as high as 30% on small-cap stocks, since they tend to be more volatile. Other more conservative traders use tighter stops, like 8%.
Again, the point is really the discipline, and ultimately you don't want to be in the position where a stock has fallen by big double digits. Keep in mind a stock that has fallen by 50% means it has to rise by 100% to just get you back to where it was when you bought it.
Trust me, you don't want to be in that situation.
By implementing trailing stops, chances are you'll never need a 100% return just to get back to even.
Keep Track Of Your Stops
When using a trailing stop-loss, or even a "hard" stop-loss, I DO NOT recommend placing the actual stop-loss order into your brokerage account. Of course, there are exceptions -- maybe you're leaving on vacation and don't want to leave your portfolio unattended, or will otherwise be preoccupied. But for the most part, I don't recommend placing them with your broker.
My reasoning here is that I don't want to a stop to be executed during intraday trading. We've all seen "flash crashes" and seen stocks tumble, only to close higher. If you have a stop placed and something like this happens it will likely execute at a terrible price. That's why I use closing prices.
If a stock closes below the 15% trailing stop-loss, simply sell it the next trading day.
As the term implies, a 15% trailing stop-loss "trails" the price of the stock. So as the price moves up, so should your stop-loss. Let's look at Applied Materials (Nasdaq: AMAT) as an example. On September 29, 2017, the stock closed at a new high of $52.09. That means the 15% trailing stop-loss would have been $44.28 (52.09 x .15 = 7.81; 52.09 - 7.81 = 44.28). Had the stock gone on to close below $44.28 we would have sold the next trading day.
Instead, the stock continued to climb and make new highs. Thus its trailing stop-loss also moved higher. By November 21, 2017, the stock closed at another new high of $58.80 a share. That puts the 15% trailing stop-loss at $49.98. As the shares climb, so does the trailing stop-loss.
But when AMAT closed at $49.77 on December 4, we closed our position according to the stop-loss (which was still at $49.98). Don't worry -- we still booked a 67% gain.
In order to track trailing stops, I personally use Excel. I find it easier to manipulate than my brokerage account, plus I don't have to worry about getting signed out. You can actually pull in stock information right into Excel (most brokerage services even offer an excel file download of your portfolio).
There are also Excel add-ins that allow you to type in a ticker symbol and pull in nearly any data point you want.
Just remember that there's no magical number to use, but you can adjust it to find your "sweet" spot. Remember that the stop-loss is based on the stock's highest recent close, and I base my sells off of the closing prices only. Also, as the stock rises, so should your stop price. And last, but not least, don't place your stop losses in your brokerage accounts.
P.S. Setting a stop-loss for each of your holdings is a great step. But I strongly recommend you give my premium service, Maximum Profit, a risk-free trial. That way, you'll have a winning system that uses proven fundamental and technical indicators working for you. You'll no longer have to worry about what to buy, when to buy -- or when to sell. Simply let Maximum Profit do the work for you. To learn more, simply follow this link.
This article originally appeared on StreetAuthority.com.