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Trailing Stop - A Little Insurance For Your Profits

In todayís world, you buy insurance for everything. You have a policy that insures your next cruise in case of hurricanes, you spend a small fortune for health insurance, and you even have a policy that protects your coffee maker! Well, if that $40 coffee maker needs a little protection, what about your stock portfolio? In this article weíre going to talk about something that will not only save you money in the stock market, it can even help you make more money. Weíre going to discuss Trailing Stop Orders.

First, the definition; a Trailing Stop Order is a percentage-based stop loss strategy. Stop Loss Orders are defensive strategies that protect a stock if the price drops below a certain point. A Trailing Stop Order is different from a typical Stop Loss Order in that it does not rely on a target price, but rather a target percentage to implement a sell. A Stop Loss only prevents you from dropping below a target stock price that you determine; a Trailing Stop follows a stock as its price rises. By doing this, a Trailing Stop Order not only protects against a fall, but it also allows for additional profits. Hereís how it works:

Many stop loss strategies & techniques offer you this protection. You identify a bottom for your stock and say, ďIf my stock drops to X, I want to sell immediately.Ē In the case of a Trailing Stop, you donít identify an exact dollar amount, but a percentage instead. This is the insurance for your original investment. Assuming your stock has risen while you have owned it, you can set your Trailing Stop percentage such that it doesnít fall below your original price. Remember that if youíre protecting your original return on investment, it now includes the cost of both buying and selling your shares. If youíre happy with simply not losing, place a Stop Loss Order and relax at this point; if you want more, letís do something else.

Ok, you could have just insured your stock against a bad loss; itís good stock market advice, but your stock charting indicates a rising trend on this company. Are you willing to only protect your investment or do you want something more? Thatís what I thought, you want more. I have the answer for you. The difference in a Trailing Stop Order is that since itís a percentage, it moves with your stock price. When your stock was at $25 per share, your 20% Trailing Stop would implement a sell if the price dropped to $20 per share. Well now that your stock has soared to $50 per share, you want to protect your profit, right? Thatís why you have a Trailing Stop; a 20% stop order wonít sell your stock unless it drops to $40 per share. Because the Trailing Stop can move as the stock increases, your profit is protected against an unexpected fall. That insurance just allowed you to make and protect an additional $20 per share and that money will look real nice in your pocket and it just made you a successful trader as well!

Trailing Stop Orders are a helpful way to not only protect what you have, but to protect what you might gain as well. When used as part of a stock trading plan, it can be a valuable piece of insurance for your portfolio. You have insurance for everything; itís time to have it for your portfolio as well!

 

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