Limit Your Losses Like The Pros – Use Trailing Stops

Water faucet dripping money - here's how to limit your losses like a pro

As we’ve said often before, both amateurs and professionals make mistakes.  But professionals limit the damage and keep from wiping themselves out.

Here’s an important technique professionals use to minimize their stock losses.  It’s called trailing stop losses, and it’s a technique I use (I even have it automated).

So here’s the thing.  Instead of just deciding we will sell our stock if it goes down 25% from where we bought it, we are going to do something smarter than that.

Whenever the stock goes up higher, we are going to say we will sell it if it goes down 25% from that higher price.  So if we bought a $1000 worth of Microsoft stock, if the value of the stock went down to $750 the next day, we would sell our shares to limit our loss.

But if the shares went up to $2000, we just made $1000.  It’s not smart to wait until it goes back down to our original $750 stop loss now.

We set our standards higher.  We make our new stop loss 25% from the highest price we’ve owned it at — $2000.  Now we say we will sell the stock if it goes down to $1500.

See how that works?  Our stop loss amount trails up by following the rising stock price.  Hence the name trailing stop loss.

And in our illustration where our stock investment went up to $2000, even if it goes down 25% from there to $1500, our new trailing stop limit, we sell at a profit.  Because we bought the shares at $1000 and we sold them at $1500.

Don’t you just love it when your stock goes down and you still make money?

Now you’re thinking like a pro.

To your health and prosperity – John

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