I’m a huge fan of trailing stop loss orders. Sadly my current broker doesn’t provide it and my old broker changed systems!
My personal view is this should be a hygiene factor for any investor. That might be my more adventurous trader side coming out but I’ll explain my view.
With my investments I try and place stop loss order which never expire, this is my attempt to protect myself against having my gains wiped out by a market movement that I wasn’t prepared for or I might not be actively looking at the price. It’s also to keep in line with the principle of letting winners run and cutting losers early.
Let’s say I buy Company X for £100 a share. I set my stop loss to be £90-95 (depending on volatility) what I am trying to achieve is setting what level of risk I’m willing to take on an investment, in this case I’m saying between 5-10% is how much I am willing to lose (take into account your commission charges with these calculations.)
Now this works fine to protect me from making a serious loss unexpectedly e.g. think Beyond Meat when they announced the next stock sale at a discount. However, it doesn’t protect your profits.
What I end up doing is checking in on the investment every few days or weeks to cancel stop loss orders and set them back up, with a higher stop loss price. Ideally locking in profits should I see an unexpected movement. However this requires a lot more management on my side and it isn’t always top of my priority list.
This is where a trailing stop loss comes into play. This is absolutely the protection I am looking for. It means I can keep a consistent level of risk while actively protecting my gains. This is far more common in the CFD/FX world and I don’t see why it shouldn’t be common place for regular trading.
Worst case an investment I love triggers my trailing stop loss. I lock in some profit. If I still like the investment even after the dip, I can buy back in at a cheaper price.
The downside is the price dips to trigger your stop loss and then the price rises again, meaning you exited earlier than you needed to. I see this as risk management, are you making a logical risk based decision, or an emotional one.
If you want to get really fancy you can mix and match trailing stops with trailing buys, to try and capture momentum, however you are blurring the lines around over trading and just setting up a momentum based trading system.
Bottom line for me is risk management, just because I like an investment at it’s currently valuation, will I feel the same way when it’s -20% down versus book cost? Will I then make an emotional or logical decision on what to do next? Will I end up holding onto loss making investments because I refuse to sell in a negative position?
Futures and Options trading books spend a lot of time thinking about risk management, I believe even my long term investments need that level of risk management in place to. When I make an investment I should have a strategy in place, and a trailing stop loss or even just a regular stop loss should be part of it.