Trailing Stop-Losses
24/07/2007
What do you do if you like to trade but have a full-time job so maybe can only look at your shares and take action once a day? How can you make sure you exit at a profit? Some investors use what they call ‘trailing stop losses'. This means that as the share you've bought into rises, so does your stop loss. It keeps rising as the share goes up and means your profit should get locked in. Some brokers are now offering to manage your trailing stop losses for you. What does it mean? Say you bought a share at 200p; you can set a trailing stop loss of say 20p. If the share goes to 180p, it gets sold and a loss taken. However if it goes up, the stop moves up 20p under the price. For example the share goes to 260p, the stop is now 240p. If the share goes to 300p, the stop becomes 280p. So let's say the stock does go to 300p and then falls back to 280, the stock is sold for an 80p profit. In other words, your trailing stop takes a profit for you, removing the emotion out of any decision. I think this is a marvellous idea especially for newer investors or those who can't be at a screen all day watching prices. The broker will try and sell your shares once it hits your stop ensuring a profit is taken. In the end it's down to experience - and trial and error. Some brokers (Barclays certainly does) have demos of trailing stops on their websites so you can try it out. As we head for August we seem to have avoided any massive market crash (so far!). August isn't such a bad month for shares. One thing to look for is companies actually reporting in August. There aren't many but if you find one that produces a strong statement, you often find the share price responds very well on smaller volumes. Also it is worth looking at companies reporting in early September - sometimes August is a good time to get in, in the run up to the results.
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