Your Best Buy/Sell Strategies
There’s no easy, one-size-fits-all approach you can use to perfect your buying and selling.
Timing trades and investments takes a certain finesse. You have to mesh sound strategies with your unique trading personality in order to find what works best.
On Monday, I showed my Trend Playbook readers how to fine-tune your buying strategy to help maximize your potential gains — with less risk of getting stopped out. (You can find the full write up right here.) Today, I would continue that discussion regarding the finer points of stop losses and selling.
But before I get started, I want to remind you that the techniques I’m about to reveal are starting points you can fit into your own investing or trading strategy. What works for a swing trader might not work for someone with a longer-term view of his investments. Keep that in mind…
Also, don’t forget: You can’t predict every tick the market makes. Rarely will you execute a “perfect trade.” However, I can promise that you’ll find ways to squeeze additional gains out of the market if you incorporate some of my selling tips into your trading toolbox.
Let’s get started with a question from one of Trend Playbook’s readers:
“Could you please give some guidance on trailing stops? Points versus percentage, when to place them and where to place them? It always seems that too close is wrong and too greedy gets you slaughtered.
“You don’t want to use a stop loss, because then you are naked and the brokers will kill the stock long enough to grab yours at a bargain price, right? Then the stock goes right back up without you.
“Is that a correct assumption?
“Aside from your stock hitting your particular target and selling, how does one protect profit and their butts at the same time?”
These are some great questions. And to make sure I hit on every point, I’m going to divide my answer into three parts:
1. Trailing Stops
Use technically significant levels for trailing stops, such as horizontal support, trend lines, or moving averages. Don’t arbitrarily assign a trailing stop based on the maximum dollar amount you are willing to risk on a trade. If a reasonable support level for your trade forces you to risk too much money, your position size is too large. Don’t adjust your stop — adjust how much you’re risking on the trade.
With every new trade, you should calculate your risk, stop levels and optimal profit targets. Failing to do this important work before you trade will eventually lead to emotional decision making — and bad trading mistakes…
2. Mental Stop Losses
I like mental stop losses for a couple of reasons. Mental stops allow you to keep your trading strategy to yourself — instead of having a sell order out there where everyone can see it. They also give you some wiggle room in case the market is acting screwy.
If you do need to set a stop loss for whatever reason, pick an odd number that won’t get you flushed out of your position if market makers go fishing for orders. For instance, if support is at $8, pick $7.93 as a stop loss. This way, you will have less of a chance at getting whipsawed, since there will probably be a larger supply of shares available right at the $8 break.
3. Protecting Profits
I’m going to keep things simple here and echo some of my comments from last week:
First, if you have trouble sticking to your trading plan, you should consider selling half your position once you get an initial pop — or when the stock hits a preliminary price target. Then, you can move your stop loss up to your entry price for worry-free trading. You’re guaranteed to at least book some profits on your trade — while at the same time allowing the new trend the leeway it needs to develop.
Greg Guenthner, CMT
Start your free Tomorrow in Review email subscription...We Will Not Share Your Email Address
We Value Your Privacy