Consider using trailing stop orders to sell your next stock. I recently discovered this new way to trade stocks. It’s always been around but I’ve never taken any time and effort to learn about it. Everyone knows about limit and market methods to buy and sell stocks. Using limit helps you buy and sell at a very specific price you desire so you have more control of your transactions. But when you use trailing stops, you ride the momentum of the stock and maximize your profit.
Basically, you set a limit value, either dollar value or percentage below the current price. If the price continues to go up, your activation limit price that you set will go up as well at the same rate. If the price all of sudden goes down, your activation limit price remains the same and will trigger if the price hits that target activation price. It’s a smart way to design and implement your exit strategy.
Consider the following example:
Stock Company: ABC
Stock Price: $307
Trailing Stop Sell Order: $15
It’s at 307 right now. You set a trailing stop sell order at $15. This means your activation price is now at $292. If the price goes down to $292, it will trigger and it will execute at that price or very close to that price. If the price goes up to $325, your new activation price will be $310. The activation price will ride the momentum of the stock upward, but not downward. As soon as the stock price starts going down, the activation price will remain at its highest. Say the price went up to $347. Then it retraced back to $336 before going back up to $375. During this time, nothing happened because the price never went below your activation price of $332 (347-15). When it went back up from $336 and to $375, the new activation price is now at $360. Now, if the price retraced again to $350, you would have sold your stock at $360.
You can do this for percentage as well. Instead of $15, you can set it to 5% with the same philosophy.
All of the budget online stock brokers offer trailing stop orders along with market and limit orders. So, if you have a stock that has been doing well and don’t want to be in the middle of tanking price all of a sudden, consider setting a trailing stop order now to maximize your profit. As long as your stock keeps going up, you’ll never have to sell.
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I could never get this right! Best done in a tax-deferred account if we expect more ‘flash’ crashes like the one we had a few months back to avoid footing a needless tax bill.
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