We’ve talked before about the importance of having an exit strategy, and why it’s something that smart traders utilize. Knowing when to sell is essential and is the most challenging part of successful investing.
As we’ve mentioned before, using trailing stops is one of the absolute best strategies to help you take the emotions and guesswork out of investing. Trailing stops provides a sound, data-based way for traders and investors to maximize gains and limit losses.
As critical as it is to know when to sell your investment, however, you’ve got to buy before you can sell! We know that there is abundant advice out there about what to buy and we know that TradeStops is primarily in the business of helping you know when to sell. But did you ever stop to think that trailing stops might also be able to help you know when to buy a stock?
One of the biggest mistakes that investors make when buying a stock is trying to catch the proverbial falling knife. A trusted advisor recommended a buy on XYZ at $100 per share and now it’s only $75 per share. If it was a good buy at $100, then it’s a great buy at $75! Right?
We all like to buy things at a “discount” but this can be a treacherous practice in the stock market. More often than not the stocks on the “25% off” rack eventually end up on the “50% off” rack before starting to be seriously snatched up.
How can you know that a falling stock has started to find some buying interest?
How about a trailing stop?
Huh? Don’t trailing stops tell us when a stock has started to fall? Normally, yes. However, if you enter a trailing stop alert on a “short-sale” position, then the trailing stop actually tells you when the stock has started to rise.
Let me explain …
For those of you that are new to the concept of selling short, it’s really not that hard to understand. The basic idea is that you:
- Borrow the shares from your broker;
- Sell the shares on the open market;
- Hopefully, buy the shares back for a lower price later on;
- Return the shares to your broker;
- Pocket the difference between what you initially sold the shares for vs. what you paid to buy them back.
In other words, the lower the stock goes after your initial “sale”, the more you profit.
Don’t worry if this concept isn’t clear or it makes you uncomfortable. We’re not talking about actually selling short stocks. We’re talking about putting a trailing stop alert on a “short” position.
One of the new features of TradeStops 2.0 is that you can identify individual portfolios as either Investment portfolios or as
Watch-Only portfolios. Investment portfolios are for investments that you actually own. Watch-Only portfolios are for things that you’re keeping an eye on.
So now let’s imagine that we want to buy XYZ since it has fallen from $100 to $75. Rather than jumping in and buying at $75, we want to know that XYZ is starting to see some buying interest.
So we set up a position and alert in a watch-only portfolio in XYZ, identify it as a “Short” position in the Long/Short field and put a 10% trailing stop alert on the position.
Now remember, you’re not actually going to sell short… you’re simply going to set your trailing stop alert as if you had sold XYZ short.
So, what have we accomplished here?
Since the position was set up as a “short” position, the point of maximum profit is reached at the lowest closing price and our 10% trailing stop alert will be triggered when the price rises 10% above the lowest close.
See the idea now?
A trailing stop alert on a short position will tell you when a stock has bottomed and reversed direction. You’ll be able to see the start of an uptrend in the share price.
The alert you receive will be triggered as soon as the stock you’re tracking has begun to move up the percentage amount you’d set from the start. In essence you let the stock show you that it wants to go higher before you jump in and buy it.
Note that there is nothing special about the 10% threshold we used in our example. You can set whatever percentage trailing stop you want.
When you combine this method with the other tools available to TradeStops subscribers – including the Position Size Calculator (to help you know how much to buy), research charts, portfolio management tools and the trailing stop alerts to know when to sell – you have a complete suite of investing tools at your fingertips…tools that will make you a smarter, more informed investor and trader.
And when you add in the additional alert types and templates available to TradeStops Complete subscribers, you’ll give yourself an even greater chance of reaching the investment results you’ve been aiming for.
You’ll be amazed at all that TradeStops has to offer, and you can start making the right moves towards smarter investing today. Start using TradeStops and TradeStops Complete right away and you’ll be ready to “buy low and sell high”. It’s the smart, profitable, and winning way to make your money work for you!