The Trailing Stop Strategy
Warren Buffett advises us that the most important Rule of Lasting Wealth is this: Don't lose money! And the second most important Rule is to: Never forget Rule #1!
One of the most difficult decisions facing any investor is knowing when to sell. When buying stocks, you must have and use an exit strategy. But your exit strategy - to be effective - must make you cut your losses while allowing your winners to continue growing. If you follow this pattern then you will have the best chance of outperforming the markets over time.
The trailing stop exit strategy I speak of is simple. It allows you to stay the course with your stock investments for as long as possible, but when you see that a particular stock shows signs of performing poorly, your trailing stop exit strategy is then in place to protect you from serious damage in case that certain stock should go into free fall.
Of course you could find many reasons for selling a stock, but just in case you fail to recognize a major problem before a stock should crash, having a trailing stop strategy in place will serve as a last ditch effort to spare you from serious loss of your hard-earned investment dollars.
You have to decide at the very outset when buying a stock issue as to your comfort level in case the price should fall below what you paid for the shares initially. I prefer to set my trailing stops at 20%. This would mean that if I buy a stock and pay $40 per share, I would not hesitate to sell immediately if the price of the shares dropped to $32 per share. However, there have been certain volatile shares in the past where I set my trailing stop down as low as 7%, and that was because the nature of the stocks in question could move quickly.
Trailing stops also help you protect any gains. If the $40 dollar stock noted above had risen to a price of $55 per share, I would then reset my trailing stop for that particluar stock to a new 20% trailing stop of $44 per share in which case, should the stock decline down to my preset stop, I would therefore have protected a $4 per share gain on my investment in those shares.
Is there anything magical about trailing stops?... The answer is, no not really. But what is important is the discipline that you develop in handling your stocks because of using a trailing stop strategy. Also, you never want to be in the position of having to recover from where your stock has fallen by 50% or more because this means that your stock would then have to rise by 100% or more just to get you back to where it was when you bought it originally. And by using the trailing stop strategy consistently, chances are that you will never be faced with a serious loss in your portfolio!
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One of the most difficult decisions facing any investor is knowing when to sell. When buying stocks, you must have and use an exit strategy. But your exit strategy - to be effective - must make you cut your losses while allowing your winners to continue growing. If you follow this pattern then you will have the best chance of outperforming the markets over time.
The trailing stop exit strategy I speak of is simple. It allows you to stay the course with your stock investments for as long as possible, but when you see that a particular stock shows signs of performing poorly, your trailing stop exit strategy is then in place to protect you from serious damage in case that certain stock should go into free fall.
Of course you could find many reasons for selling a stock, but just in case you fail to recognize a major problem before a stock should crash, having a trailing stop strategy in place will serve as a last ditch effort to spare you from serious loss of your hard-earned investment dollars.
You have to decide at the very outset when buying a stock issue as to your comfort level in case the price should fall below what you paid for the shares initially. I prefer to set my trailing stops at 20%. This would mean that if I buy a stock and pay $40 per share, I would not hesitate to sell immediately if the price of the shares dropped to $32 per share. However, there have been certain volatile shares in the past where I set my trailing stop down as low as 7%, and that was because the nature of the stocks in question could move quickly.
Trailing stops also help you protect any gains. If the $40 dollar stock noted above had risen to a price of $55 per share, I would then reset my trailing stop for that particluar stock to a new 20% trailing stop of $44 per share in which case, should the stock decline down to my preset stop, I would therefore have protected a $4 per share gain on my investment in those shares.
Is there anything magical about trailing stops?... The answer is, no not really. But what is important is the discipline that you develop in handling your stocks because of using a trailing stop strategy. Also, you never want to be in the position of having to recover from where your stock has fallen by 50% or more because this means that your stock would then have to rise by 100% or more just to get you back to where it was when you bought it originally. And by using the trailing stop strategy consistently, chances are that you will never be faced with a serious loss in your portfolio!
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posted by Bob Moser at
8:07 PM
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