One new reader is still uncertain on the proper use of the sell stops. Here’s what he had to say:
In your write up for new investors you say that as soon as you buy a mutual fund or ETF, you establish two sell rules. The upside and the down side.
The down side is clear – a trailing 7% stop or TTI falling below its MA.But the upside selling rule is unclear. Can you please elaborate on how you set up the upside selling rule?
When the markets go your way, after you have purchased an ETF or mutual fund, the same 7% sell stop rule applies to the upside. You follow the trend upwards until it reverses and the trailing stop loss point gets triggered. Since you have been accumulating profits, the sell stop will tell you when to take them naturally, that is when the trend ends and starts to reverse.
With this in mind, the trailing stop loss point fulfills two functions:
1. It limits our losses in case the trade goes against us, and
2. It locks in our profits if prices continue to rise until the trend ends
Trend Tracking, along with the disciplined use of trailing sell stops, greatly reduces market risk.
Comments 2
If you need help setting and tracking a trailing stop loss, try: http://exitpoint.com/ You can also set email alerts. Ulli included this site in one of his blogs some time back.
I lend my support to the concept of a trailing stop. It has prevented me from talking myself out of staying in positions only to see them fall further.
The much-needed discipline the stop provides is helpful. It is true that you will give up some of the gains but I’d rather do that than watch gains go back to zero or worse, or have bad investments fall through the floor.
The 7% trailing stop, no magic number, works very well for the typical mutual fund or ETF. I do adjust it for certain funds based on their volatility (e.g., ultra long or ultra short funds, which I use sparingly).
Finally, using a simple spreadsheet, I update the closing prices everyday to watch for prices approaching their stops.
Good luck, everyone.