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Trailing Stop Loss

In a way, almost every stop loss that is carried with an open position is a trailing stop loss. The price level that closes an open position is generally moved as either price or time advances. I will use a long position in our example. You and I buy a stock at $100 and we decide to place a sell stop below the market to protect our account, in case we are wrong about our investment decision.

Some traders and brokers use a flat percentage calculation for this stop price level. This is a mistake. A flat percentage stop assumes that every stock trades at the same level of volatility. They do not. The average price movement on a daily basis in stocks is about 1-3%. However, there are many stocks which may move on a daily basis more than 5 percent of their daily prices. This is especially true for active low priced stocks.

If I use a flat trailing stop loss of 10 percent, for most stocks, the stop loss would be about 3 1/2 days movement away from current prices. [If a stock moves 3% of its price a day and does this 3 days in a row, prices have moved 9 percent of its price.] This sell stop may be fine for a stock that moves 3% of its price per day, but what about a stock that moves 9 % of its price a day? Yes there are many stocks that move that much of their price in a single day. Such a stock could be stopped out in a single day’s move against your position. You could easily be stopped out, just to watch the stock move back higher after you are out of the trade.

Trailing stop losses are a money management tool not a forecasting tool. Trailing stop losses are called that because they trail behind current prices and move as time or price advances. They are used to “lock in profits”. This means they are used as a tool to protect an account financially. Trailing stop losses are generally kept so close to current price levels that they are easily “hit” during price corrections within a trend. While a profit may be insured by the use of a trailing stop, the use of a trailing stop loss can take a trader out of a major trend rather easily.

This is the problem with the trailing stop. The average market correction easily hits many types of trailing stops and the end result is that the trader misses a potential dynamic bull market by the use of such a money management tool. Traders may point to the bull market in IBM or AAPL, but a strict use of a trailing stop could have taken them out of those trends early in the game.

The use of stop orders to close positions is very complex. Quantitative research focuses on their affects over time and the end result risk-to-reward profile from the trade strategy. Here is what you do to see if your trailing stop loss is working for you. Plot your trail stop on a chart and see if the trailing stop is easily hit during normal market corrections within a bull market. Look at many examples of bullish trends. If you see that your trail stop is easily hit during the typical market corrrection, then you know that you will be taken out of most bull markets very easily. This means you may miss a major move.

www.traderscountryclub.com was created to help you with trading and investing. This site will launch soon and you can learn more about stops of all kinds, as well as other monoey management strategies. The use of trailing stops are a major topic within the education section. Happy trading.

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2010.01.13 / no responses / Category: Bulls and Bears, TCC, The Stock Market
Are You Getting Ready for Next Year?

The bull market for 2009 has been unusually strong and a trend which has been rather consistent. From a trading or investing point of view, it has been one of the easier price trends in which to participate. Now by no means do I imply that trading is easy. It is never easy. However, the bull trend which began in March has had only minor corrections during the price rise. Bull trends with constant reversals create many opportunities to make a mistake in investing. The bull market of 2009 was one of the most consistent price rises you will witness.

The bearish trend in 2008 was also clearly identified, if you knew what you were looking at in your charts. My question is whether you feel comfortable in looking at a price trend in a stock or commodity chart and developing a trade plan from what you see? If the answer is no, then you need to make that part of your new year’s resolution for 2010. Learn as much as you can about how to read a price chart. If you do, you will be rewarded for many years to come.

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2009.12.23 / no responses / Category: Bulls and Bears, TCC, The Stock Market, Uncategorized
Irrational Exuberance in the gold bull market rally?

Everybody just loved gold. Radio and Television ads continuously pleaded that everyone, even your children, should own gold. And the public rushed in as gold moved above $1,100 and $1,200. Now we will see if they have the staying power to hang on during the first major correction of the bullish trend.

The US dollar is the supposed culprit in this sell off, but I am not so sure. Every market reaches an over reaction point. All trends eventually have a correction, because the last of the eager sellers finally quit selling or the last of the eager buyers finally quit buying. Every bull trend easily reverses as soon as the next buyer steps aside and says “I don’t think so. I’ll wait.” That is what we have now in the gold market.

How far can this decline go? Considering the amount of “new” buyers and investors in the gold frenzy, who knows. Some will come out and sell early, because they have no stomach for the correction and others will try and hold on. It is best to wait until you see a clear sign that prices have stopped their decline. We have not seen a bull market that was built upon such a foundation of hype for some time. It will be interesting to see how this plays out.

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2009.12.17 / 1 response / Category: Bulls and Bears, TCC
Now the Bonds are Giving Us Hints That Higher Rates are Ahead

The 30 year bond futures have broken below the lows of the past few weeks and this may be the start of a bigger decline ahead. As bond futures fall, rates increase. Watch the next rally in both the 30 year bonds USZ09 and the Ten Year Noteas TYZ09. If the next rally in unsable to move above the high of the previous 3 days, then we may be in store for a more serious decline later this month. Active traders should be on alert for potential shorts in these markets.

A severe correction in the equity market may prevent a market fall in the bonds or notes, but so far there has been nothing but an incredible rally in the equity markets. Combine this with higher commodity prices to instill a fear of inflation and you get a depressed bond market in the futures markets. What we do in the futures markets in the bonds and notes the next few days may set up a trend that will last for several weeks.

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2009.10.14 / no responses / Category: Bulls and Bears, Mortgage Rates, TCC, The Stock Market
We sure hit it right during the last few minutes of the show on Friday.

There are plenty of possible reasons the government might act the way it does right now, regarding fiscal and monetary policy, but the only logical reason for the government to act the way it does is to intentionally stoke the fires of inflation.

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2009.05.10 / no responses / Category: Bulls and Bears, Dan Cofall