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Trailing Stops
By Bruce Mushial

     Have you made a nice gain in a stock only to see it disappear? You certainly didn't want to lose your gain but it just somehow escaped you. Maybe it went away quickly or maybe it went slowly, but it went away just the same. Or even worse you had a gain in a position only to end up getting out of the trade below your purchase price with a net loss. How do you protect your gains? The easiest way to protect yourself against losing gains is the same way you protect yourself from your losses getting too large in a losing trade: you use stops. Some traders think stop orders are just to protect themselves when a trade goes bad, but that's not their only use. A stop order frequently used by active traders is called a trailing stop or a protective stop. When you have a gain in a position you place the trailing stop above your purchase price and below the current share price. The logic here is that if the price comes down from its current levels it will automatically be sold above your purchase price, locking in at least a portion of your gain. If the position continues to move higher you should move up your stop price to lock in a greater amount of your increasing gain. With most brokerage houses you have to manually cancel the stop order you are removing and enter a new stop order at the higher price. A few sophisticated trading accounts that are usually linked to a high-end software package even allow you to set a trailing stop based on a self-determined percentage below the highest price the stock has traded. The software then watches the stock price for you. If the price declines the selected percentage the software will pop up an alert window telling you which stock hit the stop price. It pops up the alert window even if you are in a different software application or are looking at stocks other than the one that hit the stop percentage. Sutton, a firm we have been familiar with over the past two years has a new trading software package coming out that will have this feature built in. Now this won't help you if you're out of the office or on vacation. If you're going to be away from where you can follow your stocks then it is better to place an actual stop order in your brokerage account. You'll have to revise the brokerage stop order manually, but at least it will automatically be executed when the price is hit, even if you have no clue the stock has declined. Setting the price for the stop is tricky. If it is placed to close to the current share price the stock might be sold prematurely due to normal price volatility. If the stop price is to low you will give away too much of your gain. In the future you will see Stock Traders Press issuing more fax alerts raising stop prices to lock in profits.

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