Exiting The Market: Sell Stop Vs. Trend Line Break

Reader Tom had the following question in regards to exiting the market:

I had some time to kill so I did a spread sheet on my brokerage results and found something interesting that raised a question.

Assuming the TTI tells us to hold, but we have a trailing 7 percent Stop Loss set…..would we be better off holding until the TTI signals a sell…or letting the Stop Loss get us out BEFORE the TTI indicates is time to bail out?

If you look at the spread sheet you can see that the July positions I was in stopped out but the TTI said “hold”….I would have been better off ignoring the Stop as you can see from today’s price points on the ETFs that were sold.

That’s a very good question. The reason for the trailing sell stop is that the TTI can move substantially above its long term trend line. Right now, it is positioned 9.07% above it. The TTI by nature is a slow moving indicator whether the market is rallying or retreating.

If you were to wait until the TTI breaks through its long-term trend line on the way down, you would give up too much profit until the sell signal kicks in. Even worse, by waiting that long, you could possibly turn a winning position into a losing one.

The alternative to avoiding that scenario is the use of the trailing sell stop. It will from time to time, as you have experienced, give you a whip-saw signal, which will cause you to have to find a new entry point if the markets head back up.

There is no way that this can be avoided (unless you buy and hold), so look at whip-saws as simply insurance, which will protect your portfolio from possible market disaster.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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