How to Use a Trailing Stop for Profitable Trades

Earlier today I received some terrific questions from a very sharp woman about trading and Stop Losses.   I really appreciate the questions as it guides me to know what my readers want to know.  So  Nancy H – thank you very much.

In an earlier posting about using a 15% stop loss, I only covered what to do if you bought a stock or an option and it lost value.   I do not want to lose more than 15%.   I want to cut my loses short and let my winnner run.    Once I am in a trade, I will look at my chart daily after the market closes when I will then adjust my stop upward – never downward.    

If my trade is positive my 5%, I will move my 15% stop loss to a -10% of my original entry price.    Let’s say that the next day, my trade was up by 15% from my entry price.   In this case, I will move my stop loss to breakeven or at the price that I bought the stock/option.    The next day, say my stock/option was up by 25%, so I would move my stop to +10% of the original entry price.

At this point,  I know that I will keep some money in my pocket.   If the stock moves up to +50%, my stop will be at +35%  (50% – 15%).   If the stock drops down below my 35% profit, my stop will automatically get me out of the trade.   I don’t want to get greedy.    I am pleased with a 35% profit.    A little better than a 2% return on a typical savings account!

Following a stop loss rule such as the above, keeps me out of emotional trading.   I don’t second guess the market.   I don’t second guess the stock.   I have no sleepless nights wondering if my stock will  come back.

Make sense?    Your thoughts and comments are appreciated.

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