Investing Wisely
When you want to make safe investments there are several ways to do it. Lets talk about stock investments and the safest way to protect your investments. People try to figure out what stocks they want to buy and then start thinking about their time frame, and they can spend lots of time in this thinking process. I think more time should be spent trying to think about when to sell the stock.
Most investors have the largest problem in trying to decide when to sell.
It’s a simple idea really: the idea is to sell the losing stock and let the winning stock alone. This is obvious. But how do you know which will be the winners and which the losers over the long haul? So how do you know when a stock is losing short term and which is a long term loser?
For most investors its easy to see the winners and losers now. But that’s not what its all about! We want to know the future winners and losers. Even when you have a falling stock, you may not want to sell it, or that it is on a downward spiral. This may be a great stock. It may just be going through a bad moment. The original thought may be the right one, and you may need to give the stock more time to get to its optimum place. A stock that you may have picked for its short term profits may be a long term winner.
But we also know the first rule of investing: Don’t lose! This means you cant just sit on it forever, and you do need to make a decision when the stock keeps falling.
Every person that is a stock investor wants to think sensibly when it comes to stocks and the decision to sell. You don’t want to lose too much and you don’t want to take too many risks.
Use the sell stop order as a tool to approaching your stocks strategically. We will define what this is. And then we will talk about how to use them.
The trailing sell stop order is a kind of order that all brokerages handle:
- This is an order to “sell” under a certain condition. You place this condition. When the condition appears, the sell order is done, no matter where you are, whether you are asleep, on vacation, at work, or anywhere.
- The condition you place is to “stop” the price. This price you chose causes the sell order to be placed. So when the stock price falls to this point, the sell order is done. You select the price when you are thinking strategically about the stock, and not based on gut feelings, or because you panic.
- ·By “trailing” order we mean. Over a certain period of time. So if the stock moves up, you can reset the “sell” price, and make it a little higher, you can verify this say once a week. When the stop price trails behind the price of the stock, then this protects you when it starts to turn downward.
- A standing order. This means that the order given is to stand until it expires, is executed or until you decide it needs to be changed or removed.
If the stock goes down you can leave the existing stop price in place. The idea is to protect you from risking too much and having too many losses. You can review and reset these stop prices quickly, it may take as long as a minute on each online stock.
Trailing sell stops limit your losses on your purchases, and can also lock in your gains as a stock rises. The trailing stop order helps you get out of the market when and if it starts to go down. This tool allows your stock to move up , but not down past a certain point that you select.
There is one true rule that I follow: You want to sell an new stock before it loses 10%. You want to set your sell stop order at around 8% less than what you actually paid.
When a stock gains 10% then you want to put your stop price at the point of the amount you paid, and this way you wont lose money on the stock. When you clear that point, then you need to learn how to set a stop price. The objective is to let the stock grow normally and have a little room for a downward turn, but keep profits.
There are two simple methods to set this type of stop price. You can put the stop point at a certain percentage under the current price (but don’t place it below the point you bought it at). This is the method I choose most of the time. The default percentage is about 15%, but it may fluctuate a little.
- A loser Stop (this is about 20% or 25%), this may be appropriate for a “blue chip” stock, one that I really expect to hold value over a long period. This is a company that usually has great dividends.
- If the stock is an ETF (exchange traded fund) I usually give it a 10% fluctuation. Fundsw are a little less variable than other types of stock, so they don’t need as much fluctuation room.
- If I plan on selling a stock I may set the stop as low as 2% to 3%. This lets me get out if the stock starts to drop.
Another way to set the stop price is by analyzing the stocks chart during the last six months to a year. You will notice that there are some falls, but overall the stock has risen and this is a part of its behavior. These fluctuations may go beyond your sell-stop positioning. But you may not want to sell this stock on this type of downward turn, because the overall trend is to go up, and it needs to continue on its upward trend.
I usually have some type of charting software than I use to figure out the stock moves (these are available on most financial sites), this software draws the stocks moving line. You should try these MA´s between 500 and 200 days. You may find that the stock has fluctuations, but really never falls below a certain line. You can use that MA as the stop price for this type of stock.
I have used this method with Chicago Mercantile Holdings. When I see this by using the MA line, the stock has kept going up since it went public. But when you look at it based on a few months framework, it is very volatile. I have even bought it a couple of times and have it trigger my stop line. Then I noticed that the stock never went under its 200 day MA line. That’s when I decided to use this as the new stop line. The stock continues to bounce but since I have the stop line at the MA line. I don’t really care. When I use this way, I hold one block of shares and haven’t interrupted them for a few years, these stocks are now moving upward at nearly 50% annually. CME is only one of my favorite stocks. This business has an exceptional business mode, and makes money faster than McDonalds can make hamburgers, it has rewarded its shareholders well. I keep myself protected on the downside and make money too. This, like percentage based stops, is set once a week. I only have to look at the 200 day MA and set my stop price.
When you use trailing sell-stop orders, you may find that you are stopped out, and that you might have been better off keeping that stock. That’s ok though. You want to cut your losses and keep your gains, sot that your overall success is not placed at risk. You can always reverse a stop-out. When you see that things are cleared up, nothing can keep you from re-buying a certain stock.
