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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 Online.com, 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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