The Trailing Stop Strategy

Adapted from True Wealth

Let's face it – most people don't know when to sell a falling stock.

They're frozen into inactivity, saying, "Should I just keep holding and hoping, or should I cut my losses now?" This state of indecision is usually permanent and often continues until you hear this: "Well, it's too late to sell now."

But if you follow the advice below, your constant state of indecision will be gone. You'll never lose another night's sleep worrying about which way your investments will go tomorrow. Unlike most investors, you'll have a plan – knowing when to get out and when to stay in for the biggest possible profits.

Buying stocks is easy. There are thousands of theories out there on why and when to buy. But buying is only the first half of the equation when it comes to making money.

Nobody ever talks about the hard part – knowing when to sell.

We've all made expensive mistakes – either missing the full upside by selling too soon or taking a huge loss by holding a falling stock too long. But it's time to make big losses a thing of the past.

In order to invest successfully, you need to put as much thought into planning your exit strategy as you put into the research that motivates you to buy the investment in the first place. So please read closely here, and think about each point...

Cut Your Losses and Let Your Winners Ride

In stocks (and in business, I believe), you must have and use an exit strategy – one that makes you methodically cut your losses and let your winners ride. If you follow this rule, you have the best chance of outperforming the markets. If you don't, your retirement is in trouble.

Ride your stocks as high as you can. But if they head for a crash, have your exit strategy in place to protect your portfolio from damage.

Though you might have many levels of defense and many reasons to sell a stock, if your reasons don't appear before the crash, the Trailing Stop Strategy is the best last-ditch measure to save your hard-earned dollars. And it works.

One simple form of the trailing stop strategy is a 25% rule. Sell any and all positions at 25% off their highs. For example, if you buy a stock at $50, and it rises to $100, when do you sell it? If it closes below $75 – no matter what.

Don't Let Your Losers Become Big Losers

What's so magical about the 25% number? Nothing in particular – it's the discipline that matters. Many professional traders actually use much tighter stops – the Investor's Business Daily newspaper, for example, recommends an 8% stop.

Ultimately, the point is, you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it.

By using the trailing stop strategy, chances are you'll never be in this position again.

The thing is PLACING ACTUAL STOP ORDERS IS A BAD IDEA.

We do not recommend placing stop orders at all. The dirty NYSE traders will pile up all the stop orders, and then execute them all at a horrible price. Interestingly, stocks often close higher the very same day, after the NYSE traders make a mint executing stop orders. DON'T put a stop order in the market.

Simply sell the day after you hit your stop.

Once you get into the habit and commit to doing it, it is not hard.

One thing in life is certain: The future is uncertain. Nobody – not even the most astute analyst or investment advisor – can know enough about a particular company, industry, or the nuances of the market to anticipate future price with 100% certainty.

But common sense dictates two fundamentals: 1) Taking small losses is much better than taking big losses and 2) Letting your profits run is much better than cutting them off prematurely.

By following this simple plan, your investment results will start to improve immediately and dramatically.