Clarification: The Sell Rule And Stop Loss Points

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.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.