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When you are investing in the stock market, you are taking on risk. That’s unavoidable. The key to success though is just to properly control it. Many people like trailing stops which trail the current price action and if “hit” , your order to sell is then executed. The stop loss is a simple but effective way to protect you when risk starts to elevate in the equity. It can protect your profits. HOWEVER – using a trailing percentage is not the best approach.
Why? Just think about it. First, the percentage you pick , whether 8, 10, 12, 15, 20, 25 etc. is going to need to be relevant to the stock or ETF you are wanting to use it for. And recommendations that you pick a one-size fits all (like IBD recommending 7-8%, or quant-investing recommending 15-20% , or financial newsletter publishers recommending 25%) – those recommendations are just bogus. There is no Magical one number. Each equity is going to have its own risk profile . That’s why you need a service like SmartStops, where our unique algorithm engine constantly is evaluating the risk of the stock or etf and then automatically calculating an “intelligent” stop loss price point you can deploy in tomorrow’s market.
Having a price point that is going to move up and down is key to really riding the trend. Otherwise, with a trailing stop percentage , that only adjusts upwards, you get stopped out too soon. And knowing when to tighten and wide the amount of % is huge. A trailing stop doesn’t do that very well. Price action should not be the only factor that dictates that. Nor should volatility or VQ. That’s another key aspect to why a trailing stop % is ineffective. It is only adjusting based on price action and can only adjust one way – upwards. So if set too tight, you get stopped out too soon. And if set too loose (say 20%), then you are not properly protecting your profits.