There are many different ways to invest in stocks and ETFs but one of the more common elements is the use of a stop to set a point where an investor wishes to take their profits. For investors who are following a stock or an ETF as it rallies, they will often use what is known as a trailing stop. A trailing stop is simply a sell order that is placed at a specific price point or percentage below the present price of the underlying asset. For example is ABC stock is trading for $25.00, an investor might put his trailing stop in at $24.00. Then when ABC Stock moves to $25.50 he may adjust his trailing stop to $24.50. He is following the rally in the stock and hopes that his trailing stop will sell him out of the stock in the event that the rally ends and the stock tumbles back.
Stops can be very effective but if a stock falls too hard or too fast, there is no guarantee that the stop price will be the price you are sold at. For example ABC stock opens at $25.50 but immediately tumbles to $22.50 because of poor earnings or a market event. If a stock drops below your stop-loss price, your sell order is handled immediately and you are normally stopped out at the market price. Stock crashes and market crashes are an inevitable part of investing in risky assets. A stop-loss then is a handy way to try to guarantee your price but like everything they need to be monitored and adjusted.
Some investors use an automated system and set their stop to stay a certain percentage below the rising price. This automated method can work well unless the percentage used is too little to accommodate a wild day on the markets which might see a swing of 5% or more in the underlying stock.
Market Direction and a Stop-Loss
On the FullyInformed members site one of the portfolios is a Market Direction Portfolio which uses Ultra type ETFs to follow the market direction. Today’s strategy article on the market direction portfolio looks at a simple method being used to try to protect the gains made in the Market Direction Portfolio while at the same time trying to endeavor to keep the trade active as the rally continues. Eventually the present rally will stall and fall back to test for support. The market direction portfolio attempts through the use of stops, to earn as much of the rally as possible but get out before the rally falls back.
It’s not the easiest of things to do but there are strategies that can be used as a market rally loses some steam. FullyInformed Members can can login directly through this link to read the rest of this strategy article or Members can sign in to the full members site here. Non-members can join here.