At Stansberry Research, we believe that the most important investing rule you can follow is to "cut your losers, and let your winners ride." That way, you’re never stuck with a worthless investment… and the sky’s the limit on the ones that are doing well.
A trailing stop is the downward limit that you set for each investment you make. It is the floor, so to speak, below which you will sell. What makes it a trailing stop, instead of a hard stop, is that a trailing stop moves up as your investment gains in value.
For example, if you buy a stock for $10, and you set a 25% trailing stop, then you would sell when the stock falls to $7.50, or 25% lower than $10.
If, however, you buy the stock at $10, and the next day it closes at $12, your new trailing stop would be $9 – 25% lower than $12.
Is there anything magical about 25%? No. You can use any percentage. Often, we'll set our stops at 50% for more volatile recommendations and 20%, or even 15%, when we want to play conservatively. With trailing stops, the discipline is what matters most.
Sell when you hit the trailing stop, no matter what. By following this simple strategy, your investment results will start to improve immediately and dramatically.