Manage Risk and Build Wealth Using This Simple Strategy

What is a Trailing Stop?

A trailing stop is a stop price set at a defined percentage below the current stock price.

How To Use A Trailing Stop Order?

  • Let’s say you buy a stock for $10. If you use a 20% trailing stop, you would sell that stock if it ever closed below $8. That’s 20% below $10.
  • However, if the stock went up from $10 to $20, you would move your trailing stop up to $16. That’s 20% below the new closing price of $20. If the stock closes below $16, you sell and make a 60% profit.
  • The use of a trailing stop is designed to help you avoid pulling your profits out too early or holding onto a losing stock for too long. But, does a one-size-fits-all trailing stop work for all stocks? Not all stocks are equal. Some stocks are highly stable, like Johnson & Johnson (Ticker: JNJ). They don’t need much wiggle room. Other stocks are highly volatile, like Tesla (Ticker: TSLA), and need more room for market moves.

Difference Between Stop-Loss Order and Trailing Stop Order

The difference between this and a regular stop-loss order is that the trailing stop price rises as the price of the stock rises, but never goes down. It’s the combination of protection from the downside and exposure to the upside that makes trailing stops so powerful.

“The most important rule of trading is to play great defense, not offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be.”

— Paul Tudor Jones

Have An Exit Strategy

Why Trailing Stop Matters?

A trailing stop can be good for investors who may not have enough discipline to lock-in gains or cut losses. It removes some of the emotion from the trading process and offers some capital protection automatically.

“Two primary rules to successful speculative trading are: cut your losses short and let your profits run. Most people cannot deal with those two rules.”

— Dr. Van K. Tharp

Summary

Trailing stops can provide efficient ways to manage risk. While standard stop orders can either limit losses or preserve profits, trailing stop orders offer you the opportunity to do both with a single setup. Familiarize yourself with the risks, and explore how trailing stop orders can help support your exit strategy.

What Next?

Stay tuned for my next article where I will discuss a simple and powerful strategy to generate consistent monthly income and build wealth. The beauty of this strategy is that it empowers you to buy a stock at a price you want. You also get paid as soon as you execute your order!

Disclaimer

The content in the above article is for information and educational purposes only. It is not intended to be investment advice. Please consider the risk involved and your personal financial situation before investing or seek a duly licensed professional for investment advice.

About Me

Amrut is a Full Stack Software Engineer who is passionate about tech and Software Development in Web and Mobile. He likes to write about coding, investing, trading, finance, and economics. In his free time, Amrut likes to understand business models of publicly traded companies and analyze their financial statements. He strongly believes in adding value to people’s lives through quality work and empower people to take control of their personal finances. He also loves to watch and discuss American Football.

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Amrut Patil

Amrut Patil

https://linktr.ee/amrutpatil | Entrepreneur | Instructor | Thinker | Cloud Architect (9–5) | 3x AWS Certified | Exploring business building & digital marketing