In this video, Anthony Planas explains how trailing stops work, why you should use trailing stops, and walks you through how to set them up step by step. For written instructions, visit WHAT IS A TRAILING STOP?
Trailing stops tell us when to exit a stock position. In the beginning, they are about risk management.
A trailing stop is a simple mathematical formula that determines when to sell a stock. It’s based on risk. Knowing our risk is the single most important part of investing. You must understand how much risk each investment poses. Balancing risk with reward is critical. That’s why trailing stops are critical.
For example, when we buy a stock, we must decide how much of our capital we are willing to lose before we sell the stock. If the shares fall 10%, do we sell? If they fall 25%? 50%?
If we use a 30% trailing stop, that means we are willing to risk one-third of our capital before we sell. If we lose one-third of our capital, we need to earn a 43% gain to recover it.
If we start with $1,000 and we lose 30%, we are left with $700. It would take a 43% gain (43% of $700 is $300) to get back to our starting point.
If you use a 50% stop on a higher-volatility company, keep this in mind: If you hit that stop and sell, you’d need to double your money to get back your capital.
Once an investment rises in price, the stop becomes our exit strategy. As the value of the position rises, we can reduce the risk to our gains by simply tightening the stop. A 30% stop becomes a 20% stop or a 10% stop.
ABOUT ANTHONY PLANAS:
Anthony joined Banyan Hill in 2017 as a research analyst. A market "outsider," he uses his science background to create an objective view of investments. This approach allows him to overcome the emotional biases that plague the average investor. His background in biogeography taught him to analyze giant data sets for specific patterns. That translates perfectly into financial research, and he now applies those tools to find opportunities to profit in natural resources. He is a weekly contributor to our free e-letter, Winning Investor Daily, and he also works with Matt Badiali on our Real Wealth Strategist and Front Line Profits investment advisories.
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