Don't Lose Your Money or Your Mind by Marjan Stojanovski

Author:Marjan Stojanovski
Language: eng
Format: epub
Publisher: BookBaby
Published: 2019-11-08T21:08:13+00:00

Many financial advisors arbitrarily set the trailing stop percentage at 25 percent, although this figure has no scientific or mathematical importance. It’s simply a safe guideline to minimize market risk and guarantee profit by selling all positions at 25 percent of their highs. The goal is to never risk a stock falling 50 percent or more, thus forcing the price to increase by 100 percent—or more—just to get you back to your original purchase price. Following the trailing stop-loss order and the corresponding 25 percent rule ensures that you will never find yourself in this position.

No matter the trailing stop percentage you set, it’s important to consider the type of stock in which you are investing. Some stocks, like Johnson & Johnson, are highly stable and do not require high trailing stop percentages to make a profit. Others that are volatile, like Tesla, need the full 25 percent trailing stop to optimize the market movement. Instead of applying a universal trailing stop for every stock in your portfolio, focus on determining the correct percentage for each stock, based on its volatility.

Let’s consider the same stock from our previous hard stop-loss order example to compare hard stops and trailing stops:

As you recall, our stock price in this example is $50.

We set our hard stop at $40 and our trailing stop at 25 percent, or $37.50. This means that with a hard stop, we sell at $40. With the same investment and a trailing stop, we sell at $37.50.

If the stock rises to $60, our exit is still at $40 following the hard stop. With the trailing stop, though, it literally trails the current price, increasing the exit price to $45—the trailing stop of 25 percent leaves us at $15 less than our new price of $60.

Both the hard stop and trailing stop limit our market risk, but the trailing stop provides us the opportunity to safely increase our profit.

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