Trailing Stops - How I Track Them... And How You Should, Too By Dr. Steve Sjuggerud
My two basic rules for consistent investment success are as follows:
1. Buy something of extraordinary value when nobody else wants it.
2. Don't lose money... use trailing stops.
Good investors concentrate their time looking for #1 above. But great investors concentrate on both #1 and #2.
"Don't lose money" sounds flippant. But it is tricky business. A good money manager can't just buy smart... he's got to sell smart too. It is my opinion that most investors - even professionals - don't have a clue when to get out when they get into a position.
Today, I'll show you a simple "worst-case" rule for when to get out - using trailing stops. And then I'll show you the software that I use to track my trailing stops myself. It's inexpensive, easy to use, very good and free to try. You ought to give it a shot...
Why Use Trailing Stops...
People don't have a plan to get out of an investment. So they risk being stuck in a position where a stock they own is down 50%... and they need it to rise by 100% just to get back to break even. Only the stock continues to fall...
They may even find themselves in a position where a stock has fallen by 90%. But by the time it's down 90%, it has to rise by 900% just to get back to break even. That's asking a lot.
What I mean when I say "don't lose money" is: "Don't put yourself in a position for a catastrophic loss." You can generally avoid being down 50%, or 90%, with a simple strategy I recommend to readers of my newsletter, True Wealth.
The simple strategy is called a trailing stop. As a very rough rule of thumb, I recommend a 25% trailing stop. Here's how trailing stops works:
Let's say you buy a stock at $10, and it rises to $20. If it falls by 25% down to $15, you sell, no matter what. It is a way to cut your losers early and let your winners ride. It is an excellent last-gasp "safety" to get you out of a loser that you don't recognize (or aren't yet willing to recognize) as a loser.
I make a point to always set my exit points right when I decide to buy something. Now it's easy to tell you this. But it's another thing to try and track it...
The Software I Use to Track My Trailing Stops
Let me tell you, I've tried everything. You can't imagine the investment services I've subscribed to. I've used services that can and do run upwards of $20,000 a year (including Bloomberg, and Ned Davis Research, for example)...
But what I use to keep track of my trailing stops is a tiny little program called XLQ Companion. It lets me track my trailing stops and tells me how far below the closing high the stock is.
I think the creator of XLQ Companion envisioned it as a total portfolio management program. You can use it for that. But I just use my brokerage account as my portfolio tracking page, and I use XLQ Companion just for my trailing stops.
Beyond the little XLQ Companion program, the actual XLQ program is phenomenal. XLQ is an amazing creation that allows you to manipulate stock data in Excel. I use it for research and for tracking my stocks, their fundamentals, and whether they're above or below their moving averages right now. Every time I open Excel, all the data and formulas are updated. Investment U Vice President Brian Hunt uses the Average True Range function of XLQ as part of his Microcap Moonshots research. It's really valuable.
Good investing,
Steve
