I'll be out of the country next week and would like to leave some trailing stops in place. If I enter an X% trailing stop, from what point does that X% trigger. Is it from the price at the time it was entered or is it X% from the last up-tick once price starts falling, or just what?

Since I'm better with examples, let's use AAPL. Currently trading 188.XX. Say I wanted to put a trailing stop of 3% in right now. How would that stop get triggered?

Sorry I just didn't understand that method in earlier discussions and I don't want to leave with fixed dollar stops in place.

thanks.

 

The stop "trails" the price (you should be able to choose form bid, ask, or last price). This means as it goes up, the price readjusts. So a 3% drop from $188.00 means sell at 182.36. If the the price went up to $195.00 in the middle of the day, then the sell price would change to a 3% drop from there, or 189.15.

The trigger price trails the actual price as it goes up, but not as it goes down. So the trigger price can only go up.

 

If had a trailing stop at $3 below $188 (using fixed numbers for simplicity) and the stock goes to 192 your stop is set to 189. If it turns and goes to 189 your order is placed. If instead it went to 190 and then back up to 195 your stop would follow it up to 192 but it would never be less than 189 even if the stock traded at 190 for a month. The trailing stop only moves in one direction. For a sell order that direction is up, for a buy order that direction is down.

 

doh, beat me to it

 

Thanks guys! That makes much more sense than anything else I've read. Do you think this is a decent way to handle things since I'll be unable to even look at the market next week?

 

It's almost certainly better than leaving it unattended.

On the other hand, be very careful about the values you choose. The more volatile the security, the more likely you will unwittingly sell the stock (costing you further profits and transaction fees) because it happened to reach, and then very quickly descend from, some random, undeserved intra day spike.

 

That is the problem -- where to put the stops. I guess I'll ponder that one after today's session.

 

I generally choose my stops based on some percentage of my total capital that I'm willing to lose -- NOT by share price. I generally will accept no more than a 3% loss (of my total capital) on any one trade. If a stock is very volatile, I might choose to extend that stop to 4% ot 5% of my total capital, so I don't get unnecessarily stopped out, but never any more than that.

A tight stop based on share price is almost a guarantee of being stopped out in a relatively volatile market. I only use tight stops, like 3% loss in share price, when I'm completely sure a stock is going to fall (like I was with LULU).

Also, if you're not confident enough to leave your portfolio alone for even a week, it probably contains a lot of risky bets. You might want to consider just re-allocating it to more reliable choices for that week.

- Warren

 

Obviously everyone's goals are different but I wouldn't set any stops on AAPL if it were me. If you believe the story and it's probably not going to change than you are just securing losses, not securing lower risk. This only applies if it's a longer term hold, you don't own it on margin, the list goes on.

I realize that AAPL specifically may not have anything to do with your question, but the above example does. If you are in riskier equities in which a catalyst could cause an unfavorable change and you'd want to leave the stock, the trailing stops are probably wise choices. The only time I change my strategy is I keep stops on short positions.

 

Seriously,

If you've got capital at risk you can't feel comfortable leaving for a week or two then you've got too much risk. Do what Warren said and sell until you can sleep easy. You don't want to be worried on vacation and you don't want to have to have your finger on the trigger all the time.

There are other strategies for hedging risk as well such as buying puts or selling calls against your riskier positions. Buying puts will protect you from downside put also chew into profits. Since we are talking about removing risk while keeping the stock then the factors to consider are how much stock do you own and how much will it cost to sell it.

If you own 100 shares of XOM or something then it will cost you $10 to sell it for cash and another $10 to buy it back. You give up all of your upside and all of your downside but your risk is nil.

If you own 10000 shares of XOM maybe you could sell 100 front month $100 calls. You collect the cash and it covers a fair amount of downside risk and you can upgrade to first class. Selling calls will eat into your margin so if you are leveraged you may have to buy puts. 100 $95 front month puts will cost you the premium but will cover any loss while you are away right down to $0. It won't impact you margin however.

Riskier volatile stocks buy puts. Safer less volatile stocks sell calls. Either way you reduce your risk to the downside for those who might find it more costly to sell a position than to keep it.

Sell it: no risk
Buy PUTs: pay a premium upfront for insurance without limiting upside
Sell CALLs: get a cash advance to cover any potential losses at the risk of paying a premium on the backend to keep the stock if you want to.

If you put a sell stop order on a position you are better off just selling it now.