Trailing Stop

Trailing Stop

Trailing Stop - A Little Insurance For Your Profits

In today’s world, you buy insurance for everything. You have a policy that insures your next cruise in case of hurricanes, you spend a small fortune for health insurance, and you even have a policy that protects your coffee maker! Well, if that $40 coffee maker needs a little protection, what about your stock portfolio? In this article we’re going to talk about something that will not only save you money in the stock market, it can even help you make more money. We’re going to discuss Trailing Stop Orders.

First, the definition; a Trailing Stop Order is a percentage-based stop loss strategy. Stop Loss Orders are defensive strategies that protect a stock if the price drops below a certain point. A Trailing Stop Order is different from a typical Stop Loss Order in that it does not rely on a target price, but rather a target percentage to implement a sell. A Stop Loss only prevents you from dropping below a target stock price that you determine; a Trailing Stop follows a stock as its price rises. By doing this, a Trailing Stop Order not only protects against a fall, but it also allows for additional profits. Here’s how it works:

Many stop loss strategies & techniques offer you this protection. You identify a bottom for your stock and say, “If my stock drops to X, I want to sell immediately.” In the case of a Trailing Stop, you don’t identify an exact dollar amount, but a percentage instead. This is the insurance for your original investment. Assuming your stock has risen while you have owned it, you can set your Trailing Stop percentage such that it doesn’t fall below your original price. Remember that if you’re protecting your original return on investment, it now includes the cost of both buying and selling your shares. If you’re happy with simply not losing, place a Stop Loss Order and relax at this point; if you want more, let’s do something else.

Ok, you could have just insured your stock against a bad loss; it’s good stock market advice, but your stock charting indicates a rising trend on this company. Are you willing to only protect your investment or do you want something more? That’s what I thought, you want more. I have the answer for you. The difference in a Trailing Stop Order is that since it’s a percentage, it moves with your stock price. When your stock was at $25 per share, your 20% Trailing Stop would implement a sell if the price dropped to $20 per share. Well now that your stock has soared to $50 per share, you want to protect your profit, right? That’s why you have a Trailing Stop; a 20% stop order won’t sell your stock unless it drops to $40 per share. Because the Trailing Stop can move as the stock increases, your profit is protected against an unexpected fall. That insurance just allowed you to make and protect an additional $20 per share and that money will look real nice in your pocket and it just made you a successful trader as well!

Trailing Stop Orders are a helpful way to not only protect what you have, but to protect what you might gain as well. When used as part of an overall stock trading system, it can be a valuable piece of insurance for your portfolio. You have insurance for everything; it’s time to have it for your portfolio as well!

Market Direction:

The consolidation continues. The Doji's, last week in the Dow, indicated the potential short-term reversal. The stochastics were in the overbought condition and prices were moving up towards the top of the trading channel. In the following days, a few more Doji's appeared. This was occurring as the stochastics started to roll over. As was consistent with the current uptrend, a pullback to the 20 day moving average in the Dow and the 50 day moving average and the NASDAQ was a logical target.

DOW

NAS

The weekly oscillations make it hard for traders. Trades either need to be very short-term or very long term. But that comes under the conclusion of analyzing what the market is providing. "Let the market tell you what the market is doing." That is the advice of the Japanese Rice traders. The successful trading strategy under these conditions should be holding positions for only one or two days at a time for the short-term trader. The longer term trader would be using the trend channels as the guide for staying in positions. The Candlestick analyst has the advantage of identifying what the market is providing very quickly.

Today's trading brought the indexes back to the major averages that have been acting as support levels during this uptrend. Although the stochastics indicate more downside, being able to identify the formations at these levels will give a clear indication of whether the moving averages are going to continue to act as support or whether prices are going to continue to move lower. Many positions were stopped out over the past day or so with slight gains or flat.

How do you position your portfolio in these market conditions? Despite the fact the up trend has been obvious; the pullbacks have to be viewed as probable profit taking. However, there is never any assurance that a pullback isn't the start of a full-scale reversal. Although the probabilities favor the uptrend continuing, it does not hurt to establish some short positions when the top of the markets trend channels are showing weakness. There will always be stocks/sectors that are starting to turnover. At the same time, the overall uptrend will have individual chart patterns maintaining relatively good strength even during the profit taking pullbacks.

The advantage of candlestick analysis is to differentiate the pullback in uptrend versus a reversal. Adding a few short positions offsets the possible full-scale reversal caused by an unforeseen event. A profit-taking pullback could turn into a full-scale reversal if something negative happened in world events that would continue selling through the previously observed support levels. On the other hand, the lack of major selling at the support levels, the appearance of indecisive signals, allows the candlestick investor to quickly close out short positions that might be ready to move back to the upside. This is a very simple strategy. No high-level analytical processes are needed when utilizing what the candlesticks are illustrated in individual stocks/sectors.

CAKE

As illustrated in the Cheesecake Factory Inc. chart, a major candlestick signal occurring at a major moving average becomes a stimulant for shorting the stock. The signal, combined with the fact that the market indexes in general were starting to get toppy, makes this a viable trade. Are the markets going to pullback to the major moving averages and turn around at those support levels? Probably, but we do not know for sure. Adding short positions to the portfolio that fit the right criteria, major sell signals at major moving averages, produces a high probability profitable trade. Covering the short positions becomes a function of what the markets are doing once they reach the potential support level and what candlestick formations appear in the individual short positions at the same time. Click here for the candlestick training CD 'Candlestick Trades at Major Moving Averages'.

Are there times to be 100% long? Are there times to be 100% short? Are there times when a combination of long positions and short positions is the most prudent portfolio mix? The answer is yes to all these questions. The candlestick signals make it much easier to analyze when each of those occurrences should be happening.

Market Technicians Association - This past week, Mr. Bigalow was attending the MTA annual meeting in Miami Florida. These meetings are very instructive. It brings to light technical analysis methods that others have improved upon. Presentations and conversations with well respected technical analysts such as John Bollinger and Ralph Acampora easily stimulates the enthusiasm for specific technical analysis methods. This meeting provided interesting insights into seasonality. Mr. Bigalow had experimented with these techniques approximately a decade ago. The improvements of computer analytical tools since that time has produced some interesting potential return improvements. The application of candlestick signals to stocks/sectors moving at seasonally indicated times creates a very strong trading concept. These statistics will become available to the Candlestick Forum members in the very near future.