During the recent correction, reader Kathy was stopped out of her international position based on her 7% trailing sell stop. With the markets having rebounded, she obviously experienced a whipsaw signal. This was her comment:
I was sell-stopped out of my 403B International Fund last week. My high was 21.27 so 7% would be 19.78. Since I can only commit to buy/sell before noon, I did so on 3/16 and sold at 19.55 (I paid 19.33).
So, once again I am at a loss as to when I get back in when you have not set a sell signal on the international. In the future, I could wait till you set the signal but I could be down 10% of more. Is there a reason to do one or other or just a personal risk tolerance? I could be out of international for years depending on what happens and that does not seem like the right approach.
The use of stop losses is not an exact science. You did everything by the book and simply experienced a whip-saw signal. There are 3 things you can do:
1. You can stay out of the market, or re-invest in another arena where the trend has remained up.
2. If you are conservative, you can wait and re-enter the same position as soon as its old high has been taken out. That would be confirmation that the trend has resumed and upward momentum has been restored.
3. However, using suggestion 2 may take some time and you will be buying near the top. If you are a little more aggressive, you could repurchase that international fund as soon as it has moved 2% above the price you got stopped out of.
In your example, you sold at 19.55 and could consider re-entering at 19.94. While that is not a guarantee that upward momentum will continue, at least it will signal a turnaround from the pullback that caused the sell stop to be triggered.
Again, using sell stops has its rewards, especially if the markets continue their downward swing. In your case, at least so far, it turned out to be a temporary pullback.
This was a hot topic on my blog about a year ago, and I have compiled the most relevant reader Q & As in a free e-book titled “(Almost) Everything You Wanted To Know About Sell Stops …But Were Afraid To Ask.”
In case you missed it, you can download your copy here.