Digging Into More Sell Stop Details

One reader had this question about the use of sell stops:

I already own some funds where the most recent high was about 30 days ago and the funds have come down about 2.5 to 4%. If I want to use the 7% trailing stop rule, do I simply take 7% of the high 30 days ago and set that as the stop?

And if I buy a fund now, do I still use the most recent high from 30 days ago or just from the price I just purchased the fund? Thank you for you newsletter and blog.

The base price from which you measure your sell stops is in fact the highest price this fund has reached since you bought it. In your first example, that would be the price from 30 days ago.

However, if you decide to purchase more of this fund now at a lower price, you start all over in terms of finding a new high price for this portion of your holdings. For example, if you buy this fund now at $10 and the price subsequently ends up moving something like 9.90, 10.05, 10.20, 10.40, 10.30, 10.15, etc., then 10.40 would be your new high price to be used as a base for figuring your 7% sell stop (until it is replaced by a new high, of course).

I have never come across this situation, since my preference is to add more positions on the way up, when momentum is in my favor, and not on the way down, when a trend reversal could be in the making. This keeps the same high price high price intact for old and new positions.

About Ulli Niemann

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