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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Fri Feb 16, 2007 1:23 pm Post subject: How to Set Stop Losses to Lock in Profits |
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I have had several questions regarding how I set stops and why sometimes I use a trailing percent stop and other times I use a specific price. I hope to help clarify my approach with this Point of Interest. The trailing stop is an excellent method to lock in profits or protect from greater losses. By placing a stop order below the current price it limits your loss to a predetermined amount. When the bid price hits the stop price your position is sold and you exit your position.
The goal of a trailing stop is to let your profits run while protecting most of them in the event of a change in the stock's trend. The trailing stop should be far enough away from the current price level to compensate for normal volatility as price moves in a larger trend. While this article is based on long positions, the same concepts hold for short positions as well.
There are three primary ways to set a trailing stop, two of which reset automatically. The three trailing stop methods are:
A percentage below the current price;
A fixed number of points below the current price and;
A specific stop price based on a technical indicator or support level that you adjust as the price of your stock raises.
Trailing Percent
The trailing percent stop trails price movements by a set percentage, but only in the direction of the trend. If the price reverses direction, the stop remains at its previous level and will be activated if the price falls below the trailing percentage. The trigger price is readjusted each time a new high is reached. If the stock's price begins to fall and reaches your calculated stop price, your order will be triggered as a market order and your stock will be sold for the best available price.
Setting the percent for the trailing stop depends on your personal risk capacity, the trend in the market and the volatility of the stock. For me I do not wish to take on a lot of risk, which is why I like to buy quality companies at a discounted price. As a result I believe I can have a lower trailing percent than many other people use. When the market is trending strongly up, a trailing percent can be slightly larger than when the market is flat or in a secular bear market. It gives the stock more room to move on its way up. Finally, the volatility of the stock helps to establish the percent. The article Setting Trailing Stops discusses a way to calculate the trailing percent based on the latest month's volatility.
Trailing Points
http://www.marketoracle.co.uk/Article358.html |
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