Hard Stop Loss Vs. Trailing Stop Loss
Stock Stop Losses
A stop loss is a predetermined point at which you’ll sell a trading position if it reaches a certain level; there are several variations that an investor can choose.
Today I will address two of those Stop Loss strategies that being a “hard stop loss” and “trailing stop loss.”
A hard stop is chosen before entering a trade and remains fixed. You can use either a specific share price (like $9.00) or a percentage below your purchase price. Example – You purchase a stock at $10 and you place a hard stop at $9.00 which is 10 % below your purchase price.
A trailing stop is calculated as a percentage below a stock’s highest recent price. That means as a stock increases in the price per share the stop loss follows the gain upward until it begins to pull back. This strategy protects against a loss of the initial purchase and protects the gains if the stock should rise in the future.
The advantage of trailing stop losses is that they allow you to stay in during the uptrend while providing a predetermined plan for exiting positions when the trend turns lower.
It is recommended that you do not place your stop loss directly with your broker, as you will be showing your hand so to speak. It is best to keep your own record or use a service that tracks price movement for you.
It’s not unusual if you create a stop loss directly with the broker, to see the price triggered, sale triggered only to watch it advance again within a few hours or the following day. There have been several days where prices swing wildly during the day and a stock being sold due to a stop loss placed directly with a broker.
Because of wide price swings, I suggest you use end of day pricing to avoid intra-day price movement when deciding if a stock has been triggered.
Financial Quote of the week – Being rich is a good thing. Not just in the obvious sense of benefitting you and your family, but in the broader sense. Profits are not a zero sum game. The more you make, the more of a financial impact you can have.
Mark Cuban
Daniel Iuculano, AAMS CMFC
Accredited Asset Management Specialist
Chartered Mutual Fund Counselor
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