Monday, November 08, 2010

Trying Trailing Stops

Until now, I haven't used stop loss orders to sell out of a stock when it declines. Over the past two years, the lack of stop loss orders has caused some of my stock to lose their gains and become losses. In a recent investment seminar, the presenter shared how he use trailing stop orders to limit losses and protect gains when the market declines.

While I realize that stop orders can increase trading costs, I am going to experiment with using trailing stop orders for some of our equity positions. For reference, a stop order is a fixed price below the current price at which a stock will be sold. A trailing stop is a fixed difference under the current price at which the stock will be sold. An additional feature of a trailing stop is that it will constantly adjust the sell price as the stock rises, but is a fixed price if the stock begins to decline.

First, I plan to apply trailing stops to stocks which have returns of 20% or more. That way, I can let the stocks continue to advance but protect the gains if the stock or the market should decline. Second, I will apply trailing stops to the new stock purchases that I will be making. This will limit losses if my decision to purchase was not correct.

For the rest of the year, I will track my results and compare them to what would have happened if I hadn't used trailing stops.
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