All of a sudden your favorite stock is falling out of the sky.
What do you do? Do you sell? Do you hold?
Or, do you freeze, becoming nothing more than a nervous, emotional trader that sells because everybody else is? Unfortunately, most of us freeze, too scared to think straight.
We get caught up in the mad rush of herd mentality.
Instead of calmly looking into why a stock may be falling (sometimes for no reason), we slowly lose our minds and sell. But that’s the wrong way to trade.
Like most of us, one of your goals is to make as much money as humanly possible. That being the case, your money is important to you and should ideally be protected.
Any one can trade a stock. That’s the easy part.
The hard part is removing the emotion from your trade, and not reacting to others’ madness.
We’ve all made that ridiculous error that cost us money either because we weren’t paying attention, sold too late, or got caught in herd hysteria.
Over the last 20 years as a trader, I’ve seen fortunes made in a heartbeat.
I’ve also seen fortunes, homes lost in seconds on one wrong move.
But we have to remember that to trade successful, we must have a plan in place.
One of those plans must involve what’s known as the trailing stop loss – the very exit strategy that removes all emotion from the trade. If your stop is hit, you’re out automatically. There’s no second-guessing. If your stock pushes higher, the trailing stop resets higher, too, never triggering until it plummets.
For example, let’s say that in the middle of November 2016, I risked $10,000 on UPS on the buying hysteria of the holiday season at $106. When the stock reaches $120, I’m up big.
All of a sudden, the stock starts to fall to $115 because the holiday rush is ending, and as others panic on the pullback. What to do? Panic and sell like a fool?
Or protect the gains I have without emotion?
I’d choose the latter with a -10% trailing stop, which means if the stock now pulls back 10% from current prices, I’m automatically stopped out, no questions asked.
Now, if UPS continues to move higher, my stop is never triggered.
However, it does reset. Let’s say the stock moves back to $120. My trailing stop of 10% would now stop me out of UPS at $114. So why do we use a trailing stop?
Such a stop keeps us from selling our stocks at the wrong time while in a solid uptrend, while preventing minute losses from wiping out your portfolio.