One great way of playing the market is by using a trailing stop to simply follow the stock up. A trailing stop is ideal because it follows the stock up when the stock does go up, but it does not pull back as the stock pulls back. This allows you to limit your losses and secure your gains.
Creating trailing stops has its many advantages.
1. It Limits Your Losses
Everybody has wins and losses. They key is to limit any losses that you do have. This way any loss you do have will play a minimum role in your overall return.
If you have a 10% trailing stop that means the most you can possibly lose off of your investment would be 10%, which puts your mind at ease and lets you factor it into your bottom line.
2. It Doesn’t Limit Gains
Another great thing about trailing stops is that it does not limit gains. If you bought stock XYZ and used the same 10% trailing stop on it that stop would have no affect on the potential increase of the stock. The stock could double or triple and you would not have to sell it. Only when the stock pulls back 10% would the stop activate and you would exit the position.
3. Takes Emotions Out
Everybody has emotions. But when you are dealing with money those emotions can affect you in a negative way as they make it harder to think clearly.
Sometimes you can create your own plan of action and end up side stepping that plan because you got scared. Well the great thing about trailing stops is that they are automated. You just have to set them up and then forget about them.
The trailing stop will follow the stock up and the trailing stop will eventually get you out of the position (hopefully for a profit). The only thing you need to do is to figure out how far behind you want to trail the stock and then walk away.
This is a perfect way to “stick to the game plan” when you cannot trust yourself to do it.
To find more about the how to use trailing stops or to get other trading tips visit Shaun’s site which offers stock market tips. This article, Benefits of Using Trailing Stops is available for free reprint.