If you’re looking to protect your investments while still allowing them to grow, a trailing stop-loss can be your best friend. It’s a simple but powerful tool that helps you lock in gains as your stock rises and limits your losses when the market turns against you.
Let’s dive into how a trailing stop-loss works and why you should consider setting one up.
What is a Trailing Stop-Loss?
A trailing stop-loss is a type of stop-loss order that automatically adjusts as the price of your stock increases. Unlike a fixed stop-loss, which is set at a specific price point below your purchase price, a trailing stop-loss moves up as the stock price moves up. This means that as your investment grows, your stop-loss level rises with it, protecting more and more of your gains.
For example, suppose you buy a stock at $100 and set a 10% trailing stop-loss. If the stock rises to $120, your stop-loss level would automatically adjust to $108 (10% below $120). If the price drops to $108, your trailing stop-loss would trigger a sell order, locking in your profit.
How Does It Lock in Gains?
One of the biggest advantages of a trailing stop-loss is that it helps you capture more of your profits as your stock’s price rises. Since the stop-loss level moves up with the stock price, you’re able to lock in gains without having to constantly monitor the market. This can be particularly useful in a volatile market where prices can swing rapidly.
By automatically adjusting, a trailing stop-loss removes the guesswork from deciding when to sell. It allows you to stay invested in a rising market while protecting yourself from a sudden downturn. This means you can let your winners run while knowing that your downside is limited.
Click here to see how to calculate your trailing stop loss correctly!
Limiting Your Losses
No one likes to think about losses, but you know they are an inevitable part of investing. The key is to minimize them, and that’s where a trailing stop-loss helps you. If your stock price starts to fall after reaching a high, your trailing stop-loss will trigger a sell order once it hits the predetermined level.
For instance, if your stock goes from $100 to $150 and then starts to decline, a 10% trailing stop-loss would have you selling at $135. Without the stop-loss, you might hold on to the stock, hoping it will bounce back, only to watch it fall further, potentially erasing your gains or even turning into a loss.
Have You Set Yours Up Yet?
If you haven’t set up a trailing stop-loss yet, now is the time to consider it. It’s an easy way to add a layer of protection to your investments while still giving them room to grow.
Even though most online brokerage platforms let you set up a trailing stop-loss with just a few clicks, we recommend that you track your trailing stop-loss manually on a weekly or even monthly basis. This is to keep from trading too often based on normal market volatility.
When setting it up, decide on the percentage you’re comfortable with. Research has shown that 15% to 20% works well.
Summary and Conclusion
In conclusion, a trailing stop-loss is a game-changer because it helps you lock in gains and limit losses, all while reducing the emotional stress of making tough decisions in a volatile market. By setting one up, you protect your portfolio and give yourself peace of mind knowing that you can manage a falling market with ease.
Have you set yours up yet?
Click here to see how to calculate your trailing stop loss correctly!
