Buy, Hold, and Sell!

Chapter 19The Trailing Stop-Loss Sell Strategy

Like the 200-day moving average (200 DMA) strategy, a stop-loss sell strategy takes the emotions out of trading by setting a predetermined sell point. But where the 200 DMA applies to the entire market, a stop-loss strategy is concerned with an individual investment. It helps you determine when to sell a specific stock, that is, when to “stop losses” on that investment.

When using a stop-loss, you decide upon a certain price that you do not want to go below, and create an order to sell the stock if it trades at that price. As an example, let's say you bought stock from Pretty Good Company (PGC) at $1.00 per share, and after a few considerations (which we'll talk about later in the chapter) you decided to set your stop-loss at 90 cents. If Pretty Good Company's stock price fell below 90 cents, your stop-loss order would be triggered, and that particular investment would be sold at the next available price.

The Trailing Stop-Loss

There are several versions of stop-loss strategies. I prefer the trailing stop-loss because it can help you to make a profit while protecting your investment.

The strategy is called a trailing stop-loss because the sell point rises along with (i.e., trails after) the stock price. If you bought Pretty Good Company's stock price at $1.00 and set your initial stop-loss at 90 cents, your stop-loss would be 10 percent. If you used the trailing stop-loss strategy and PGC's stock price rose to $1.10, your new stop-loss ...